The Americans are back
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Cross-border investing in commercial real estate fell 45% in 2023, in part because US investors stepped back from the international market. In the office sector, US outbound flows fell 80%.
Knight Frank's updated Capital Gravity Model shows US investment flowing back into the global market this year, to about 5% below the post Global Financial Crisis average. You can read the analysis from Victoria Ormond here. Our model shows that roughly a third of US outbound investment could target the UK, followed by Germany, Spain, Canada and Japan.
We predict logistics and the living sectors will be the top two outbound sectors of interest, followed by retail, office and hotels. We also think US headquartered private equity will begin to re-engage in the international markets, potentially even surpassing 2022 volumes.
Red Sea pressures
Western economies enjoyed a wave of optimism at the end of 2023 following a Fed pivot and the release of a slew of economic figures suggesting that inflation would return to target faster than policymakers had forecast. The S&P 500 hit an all-time high in mid-January, which is about the time the 'sugar rush' began to fade.
The data has since been pretty noisy - see this piece from Tom Bill. Traders have pushed back bets on the first Federal Reserve interest rate cut from March to June. The Bank of England isn't expected to begin easing policy until late this summer.
Many of the reasons for the shift are encapsulated by the S&P Global Flash PMI, published yesterday. Business activity across the UK private sector expanded for the fourth consecutive month and at the fastest pace since May 2023. Companies reported the sharpest rise in new work for nine months. Optimism among businesses is at the highest level since February 2022.
However, there were many signs of inflationary pressures. The rate of input price inflation edged up to the highest level since August, largely due to rising salaries in the service sector. February saw the highest degree of supply chain delays for more than 18 months, largely due to Red Sea shipping disruptions. That resulted in the largest monthly rise in selling prices for goods in the past nine months.
Mortgage rates tick up
It's worth reiterating that we're really talking about a delayed loosening of monetary policy, rather than a reversal. Former United States Treasury Secretary Larry Summers puts the chance of a Fed hike this summer at about 15%, but as of the January meeting the committee is still only talking about the timing of cuts.
Nevertheless, the shifting outlook does feed through to mortgages pretty quickly. Lender margins are wafer thin in the UK, so the banks are repricing quickly to prevent the market moving against them. HSBC has become the latest lender to raise its residential mortgage rates following similar moves by Santander, NatWest and Nationwide in recent weeks, the FT reports.
“It doesn’t take very much movement in the market for the lender to go underwater and actually be losing money. That’s why they have to react so quickly," Simon Gammon of Knight Frank Finance tells the paper.
We think this is part of a plateau, rather than a meaningful reversal of the falls in mortgage rates we've seen in recent months, though a lot will depend on how the data develops through March. Halifax announced more cuts to its range yesterday, for example.
1% deposits
A month ago, the Independent reported that the government was considering issuing mortgage guarantees that would enable first-time buyers to get a foot on the property ladder with a deposit of as little as 1%. The FT had its own version of the story yesterday.
With all this smoke, I think it's reasonable to expect we'll see a version of this policy in the March 6th budget (the FT report does say that no decision has been made). There are few details beyond stating the government will act as a backer. When we covered the policy last month, I said that take up could be very substantial. The government will come in for criticism for fuelling house price inflation and putting borrowers at the risk of negative equity, but it doesn't have a lot of options if it wants to help first time buyers over the short term.
There is still a lot of speculation that Inheritance Tax will be cut or scrapped as part of the budget. The Treasury collected £6.3 billion in inheritance tax receipts in the ten months to January, a £400 million increase on the same period a year earlier.
In other news...
UK consumer morale falls unexpectedly in February (Reuters), UK housing sector ripe for deals as firms look to boost land bank (Reuters), BT Tower sold to US luxury hotel group (FT), companies slash pay incentives for would-be recruits (Times), and finally, China house price declines slow as support mounts (Bloomberg).