Autumn leaves on a damp squib

Autumn Statement  Today’s Autumn statement held little tangible for the commercial property industry, as the Chancellor spent longer talking about the restoration of a listed country house than he did about a fractional benefit to business rates relief. There was no mention of stamp duty, nor any significant detail on local infrastructure projects, which comes as an expected disappointment. However, less directly there is some good news in prospect. A focus on productivity and innovation are at the heart of new fiscal framework, the centerpiece of which is a new £23bn National Productivity Investment Fund, which will invest in transport, digital, R&D and housing. Noting that four days of work in Germany are as valuable as five in the UK, Hammond set a clear agenda on increasing productivity and delivering growth, rather than balancing the slightly iffy-looking books.  The headlines:  the total net cost of the Chancellor’s proposals over the period to 2022 is c. £33bn. This entails relatively few new sources of revenue created by tax reform (c. £9bn) offset by deferment of fuel duty and other reliefs (c. £6bn), and quite a significant amount of new spending (£37bn). There is very little stimulus in this fiscal year, with some back-weighting of expenditure, (c.50% of net spend will be beyond 2020).

What a relief  The property sector had hoped for a significant adjustment to the business rates transitional relief.  There was a change – but it was not significant.  The change is from a 45% to a 43% cap on rates increases in Year 1, followed by a reduction in the second year’s cap from 50% to 32%. Otherwise put, if the business rates increase is not greater than 43%, then there is no benefit to this measure. This will be the case for much of the UK. Even somewhere like the City fringe, where the rates increase might be as high as 80%, the impact of the adjustment is just 0.2% of the nominal 5-year cashflow. Not very exciting.

Lower for much longer?  From the banks’ perspective, hopefully not, as in the past week the Co-op Bank has announced 200 job cuts, which it blames on the low rate environment. Since the financial crisis, returns on assets held by banks have fallen, whereas there is virtually no room to reduce interest on deposits, resulting in a margin squeeze. Expect further cost cutting to come. This is a global issue rather than one related to Brexit, but the MPC decision to drop the base rate over the summer will not have helped. As the US under Trump eyes inflationary policies, on this side of the pond there remains the possibility of a further rate cut over the coming months. Whilst designed to reduce consumer and business borrowing costs, one wonders whether the banks will be capable of passing on the benefit.

Black Friday, White Christmas  With Black Friday and a white Christmas on the horizon, it will be interesting to see how retail strategies unfold. Recent data suggest mixed performance among the big retailers. With inflation in the cost of goods seemingly an inevitability, there remains a debate about who should take the pain: the retailer, the customer, or the supplier. The CEOs of both Tesco and Sainsbury’s have (perhaps predictably) suggested that it should be the latter. And this may well play out to be correct. With limited wage growth in prospect, consumers’ headroom to pay more will be tested. Similarly, against popular perception, supermarket profit margins are very low (typically 1-2%) and competition may end in casualties. Wholesale food producers are similarly pressured; however alcoholic beverage producers (15% net margin); tobacco suppliers (25%) and shoe manufacturers (10%) perhaps have scope to adjust pricing –even though they will be reluctant to do so.

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Richard Pickering, Head of UK Research & Insight

Richard Pickering, Head of UK Research & Insight.

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