FULL REPORT
The latest Purchasing Manager index (PMI) survey revealed that both services and manufacturing PMIs rose sharply in July to 56.6 and 53.6 respectively. The service sector PMI was actually the highest level since June 2015. Both sectors reported increases in output, new orders and confidence compared to the previous month. It is important to understand that PMIs report a balance figure, which in this case will mean more firms are reporting things are getting better.
The good news also rippled through the retail sales figures, which increased by 13.9% m-o-m in
June, this follows a strong 12.3% in May. The retail sales figures reveal the biggest increases were seen in stores that re-opened their doors, predominantly non-food stores which were up 45.5%, including clothing and footwear 70.2% and household goods stores 46.8%. Despite the recent positive figures retail sales are down by a third of pre-crisis levels, particularly for clothing and footwear.
As shops have now been open for a full month for the month of July we could experience further growth in next month's retail sales figures.
However, the current backdrop inundated by the continuous job losses could weigh heavily on a potential rebound in consumption, thereby limiting growth.
The Summer Statement that was delivered by the Chancellor earlier in the month will help. It included a temporary holiday on stamp duty on the first £500,000 of all property sales; a ‘kickstart’ job creation scheme for young people where the government will pay the wages of new young employees for six months; a cut in VAT from 20% to 5% for the next six months on food, accommodation
accommodation and attractions and an ‘eat out to help out’ scheme to encourage consumers to spend at pubs, restaurants and cafes. The aim of these measures is to encourage spending to kickstart the recovery as we move away from lockdown measures. It remains to be seen whether these are enough.
Looking ahead, there are a number of reasons to believe the pace of the recovery is likely to be much slower, particularly as government policy support is phased out. Furthermore, the possibility of a second wave is still not ruled out.
Investment activity was unsurprisingly weak in Q2. Just £3.3bn in Q2, 66.2% down on Q2 2019 and the weakest quarter on record. Lockdown enforced an uncertain market where investors’ ability to analyse risk effectively was severely hampered, and many acquisitions and disposals were postponed in favour of preserving existing income. The Office market recorded £1.0bn, 80.2% below the 10-year average, with Retail seeing just £510.8m of transactions on account of the almost complete lack of shopping centre deals. The one bright spot was Supermarkets, which ended Q2 in line with it's 10-year average.
Overall volume for H1 2020 reached £18.8bn, 11.2% down y-o-y and 21.6% below the long-term H1 average, although the £4.7bn iQ portfolio sale to Blackstone in Q1 boosted the results.
While the numbers look bleak, H1 volume was still just over double that of H1 2009, when the UK was in the midst of the Great Recession. All investor types remain more active than in 2009, and the only sector trading below 2009 levels is Retail, on account of the long-term strategic shift to ecommerce and pricing correction.
There was a notable absence of UK institutions in Q2, many of whom have been hamstrung by fund suspensions due to material pricing uncertainty valuation clauses. Investment from institutions dropped to £735m in Q2 - their quietest quarter since Q1 2008. Activity from all UK investors over H1 reached £7.4bn, down 32.6% on H1 2019.
In turn, overseas investors invested £11.4bn, a market share of 60.6%, their highest H1 market share on record. 54.9% of this originated from US investors, who invested 86.6% more than they did in H1 2019.
The flight to safety has ensured Central London continues to be a preferred destination for investment globally. For example, activity from European and Asian investors in H1 was up 145% and 74%, respectively, on H1 2019 due to a number of high-profile office deals. Combined with chronic lack of supply, this has meant prime pricing has held up. This highlights investors' belief in the capital's future as a global hub for talent, despite questions over the future of the workplace. With deal flow already increasing as we gradually return to the office, UK and London real estate is well-placed to recover in H2.