INSIGHT
Economic and property market review
February 2023
DATA & ANALYSIS
MARKET CONDITIONS
Economic trends
- The UK government has made progress on rebuilding its reputation in the eyes of the financial markets, thanks to a return to an orthodox fiscal policy under the new Sunak administration. Having reached a low point of $1.07 on the 28th September 2022, the pound had rallied to nearly $1.24 on 27th January 2023. 10-year Gilt yields stood at 3.3% on 27th January, down from the 10th October peak of 4.5%.
- The UK economy is currently caught between the impact of high inflation, which is squeezing incomes, and the Bank of England hiking interest rates in order to tame price rises. Inevitably, the steps taken to tackle inflation have a negative effect on growth. UK GDP contracted q-on-q by -0.3% in Q3 2022, leaving the economy -0.8% below its pre-Covid level.
- Recent months have seen the economy move into a ‘stop, go’ pattern, where GDP has alternated between growth and contraction on a month-on-month basis. September saw GDP shrink by -0.6% compared to August, but in October growth rebounded to 0.5%, then slowed to 0.1% in November.
- CPI inflation eased to 10.5% in the year to December 2022, down from 10.8% in November. Many commentators believe that inflation will now trend downwards, particularly as the October energy price cap increase is in the figures.
- At the February meeting of the Bank of England’s Monetary Policy Committee (MPC) the decision was taken to increase the UK base rate by 50 bps to 4.00%. We believe the base rate is now at or close to its peak for this hiking cycle.
- The unemployment rate was 3.7%, which is unchanged m-on-m but above the 3.6% seen in September. This is low by historic standards and indicates a tight labour market.
- The IHS Markit composite Purchasing Managers’ Index (PMI) for January 2023 recorded a net balance of 47.8, down from the 49.0 in December. A reading of below 50.0 suggests an economic contraction may have occurred.
- Gfk's consumer confidence index stood at -45 in January, down from -42 in December, reflecting concerns over cost-of-living increases.
Property market
- Oxford Economics is currently predicting -0.7% GDP growth in 2023, then 1.6% in 2024 and 2.7% in 2025.
- Recent months have seen the UK property investment market move into a downturn in the face of rising interest rates and the slide into recession. Occupier markets are holding up for now, but we expect to see evidence of a slowdown next year.
- Some open-ended property unit funds have imposed restrictions on the payment of redemptions, which is usually a sign of investor uncertainty. This will probably lead to some stock coming to the market for sale as the funds move to raise cash.
- Rolling investment volumes across the UK in the year to November 2022 totalled £61.9 billion, which is down on the October figure of £66.4 billion, but just ahead of the long-term average of £59.0 billion. Sales volumes in recent months have been ebbing.
Offices
- Office rental value growth decelerated in December, with the MSCI Market Rental Growth Index for offices growing by 0.09%, compared to 0.15% in November.
- The MSCI capital value growth Index for Offices decreased by -3.3% month-on-month in December 2022, compared to the November figure of -4.8%.
Retail
- In December 2022, UK retail footfall was 9.9% higher than the same month in 2021, according to Springboard. Compared to December 2019, footfall was down by -10.9%.
- Retail capital values are declining with the MSCI index falling by -2.7% month-on-month in December, compared to -5.2% in November, marking the sixth consecutive negative monthly figure.
Industrial
- The MSCI index for industrial fell by -5.0% month-on-month in December, compared to -7.6% in November, its sixth consecutive negative reading.
- Given the growing significance of ecommerce to the industrial market, it should be noted that online shopping sales value fell by -8.9% in the year to December 2022, and was down -2.9% month-on-month.
- The Industrial sector has seen a marked decline in capital value growth recently. The MSCI index for industrial fell by -5.0% month-on-month in December, compared to -7.6% in November.
Outlook
- While the risks to the UK economy from Covid are now negligible, the consumer squeeze and above-expectations inflation have hit GDP growth. Both central bank and market interest rates rose quickly during 2022, leaving debt more expensive and less available. This is expected to result in a recession in the near-term. Oxford Economics is currently predicting -0.7% GDP growth in 2022, then 1.6% in 2024 and 2.7% in 2025.
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