FULL REPORT
The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged at 0.10% and the asset purchase target at GBP745bn.
The forward guidance reveals that the Bank expect rates to remain where there are unless “there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. However, it is worth noting the minutes do state both the BoE and the Prudential Regulation Authority will begin to evaluate “operational considerations
considerations“ on negative rates in Q4 2020. Although this appears as if the BoE is open to the potential of negative rates, we do not believe the Bank is in any urgency. The Bank is currently seeing through its GBP100bn QE programme announced in June, with purchases due to end towards the end of this year.
The market largely expects additional QE to be announced at the November meeting, just as the ECB and the Fed have done so. If the BoE does end net asset purchases this will cause a rise in government bond yields.
One thing that could alter the BoE’s path would be Brexit trade talks. If trade talks were to turn sour in October, this would increase the likelihood of a 10bps Bank Rate cut to 0%, along with another GBP100bn of QE.
Although a number of indicators point towards continued activity, with both the manufacturing and service PMIs on their upward trajectory in August it is becoming clear that the surge in activity is coming to an end. The UK PMIs are in contrast to what is currently being experienced across Europe, where a few countries have already
already been subjected to new restrictions. The UK is now following suit as a rise in COVID cases has re-introduced restrictions, which will weigh on sentiment.
Looking ahead, data for the third quarter will show a continuation of the recovery, however economic activity is expected to slow sharply over the next few months, particularly as the true extent of COVID-19 on the labour market unfolds and renewed concerns regarding Brexit resurface as the end of the transition period nears.
It is set to be a busy Q4 for the UK investment market. Preliminary Q3 data suggests volumes remain c. 50% down on pre-pandemic levels, but weight of capital is building around a few defensive sub-sectors.
The uptick in Central London activity continues. BNP Paribas Real Estate recently advised REInvest on the acquisition of 30 Lombard Street for £76.5m, a yield of 4.16%, while aggressive bidding for 20-24 Kirby Street, with the potential to gain VP in 2021, highlights the strong appetite for value-add opportunities.
E-commerce sales may be dropping back from pandemic highs, but industrial take-up continues to break records and this is fuelling investor appetite. A number of big-ticket disposals have been announced in recent weeks, with more being worked up for Q4. Prime yields are being pushed lower. Vestas Investment Management and BNP Paribas REIM have just launched the sale of Amazon's Bardon Fulfilment Centre. They are quoting £165m, a sub-4.00% yield.
In addition, AXA IM's acquisition of Dolphin Square for c. £800m is a vote of confidence in the
undersupplied build-to-rent ("BTR") market, and this will boost investor sentiment further. However, with stock in such short supply, forward funding of new schemes will remain the most likely route into the sector for most, which comes with added development risk.
This healthy appetite for core and London value-add product bodes well for Q4. With yield in other markets hard to come by, and capital fundraising for real estate holding up well, this is likely to continue, particularly as material valuation uncertainty clauses have now lifted.
However, this does not tell the full story. While volume of £100m-plus deals is only 11% down y/y, the sub-£20m category, where private investors are most active, is down 49%. Deals in this size range typically account for 20-25% of the market by volume. Moreover, retail investment has historically taken an average annual market share of 26%, but this has fallen to c. 10% in recent years. Transaction levels are therefore unlikely to recover materially until domestic private investors return to the market in large numbers and retail values solidify at an attractive level.