REG - Caledonian Trust PLC - Final Results <Origin Href="QuoteRef">CNN.L</Origin> - Part 2
23/12/2016 10:45
- Part 2: For the preceding part double click ID:nRSW7351Sa
local unemployment existed because of
structural economic changes or outsourcing, and disaffection was felt by many
workers, most of whom had not enjoyed a rise in real wages for almost 10
years. If they had "got out" the experts would have known for sure: "It's
cold up North".
A less tangible but insidious cold pervades much of the North, like a mutating
virus. Its manifestations include resentment, envy, and an inherent feeling
of the injustice of the system that seems to reward, not punish, the failure
of financiers, bankers and professionals in the face of austerity.
Reinforcing such trends is the continuing large immigration, often seen as
threat to many, for the convenience, partly disguised as moral fulfilment, of
others: in short, the re-awakening of populism, the common manifestation of
popular discontent. It is difficult to encompass such views in forecasting
models currently used which are so different to that espoused by Tetlock.
The relationship with the EU is a major determinant of the UK's economic
prospects, a relationship that is likely to change appreciably but over
stages. The first stage has already passed subsequent to the referendum. The
leave vote resulted in a sharp shock to the economy, a steep decline in
confidence and a short-term economic contraction followed by a swift recovery
to a growth rate similar to that before the vote. This recovery was assisted
by a sharp devaluation of the £ and, to a lesser extent, by monetary support
and by assurances of further support from the Bank. If business investment
has been reduced or foreign direct investment been delayed or diverted, there
has been no obvious sign so far and, indeed, none would be expected because of
the long cycle time of such decisions.
The first key question is, will Brexit happen? There will be continuing
skirmishes with pro EU initiatives provided by various groups, of which the
current Supreme Court case is evidence. A Parliamentary process is almost
certain to be required and the Government's business will prevail, possibly
with minor amendment. There will be ongoing opposition in the Commons and the
Lords, and the majority of MPs who are in favour of continuing within the EU
will always seek to ameliorate the exit conditions, and, in extremis, overturn
policy. However, without a cataclysm sufficient to produce a recognisable and
defensible material change of circumstances, the latent parliamentary
majorities will not risk a showdown with what is regarded as the democratic
will of the people. However, given any suitable opportunity they will seek to
re-open the debate in an effort to hold a further referendum.
But what does "Brexit means Brexit" mean? And what are the implications, of
any given meaning, as these implications are largely interdependent. Clearly,
it means different things to different people, and crucially, varies over
time. While the immediate post referendum panic, a shock reflex reaction from
the mistaken forecast of the referendum outcome, has proved misplaced, the
medium-term effect, over say five years, is independent of this short-term
recovery and is likely to be significant. Forecasts made post referendum,
post panic, are encouraging. The OBR forecasts growth for the next few years
as 1.4% in 2017, 1.7% in 2018 and 2.1% from 2019 onwards, only marginally down
from its forecast in November 2015 by 0.8% in 2017 and 0.4% in 2018. Thus,
the change from the pre-referendum position to the "certain" Brexit position
is quite small. The return of growth to 2.0% or over from 2019 indicates that
the OBR considers on its present assumptions on Brexit conditions that the UK
will return to or near to the long-term growth pattern by 2019. The Bank also
forecast a drop of growth to 1.4% in 2017 but a slower recovery in their
forecast period up to 2019. Forecasts from NIESR, Oxford Economics and IMF
are broadly similar to the OBR's forecast, confirming a return to near normal
growth in 2019.
The growth figures appear anomalous as the lowest growth is forecast over the
next two years during which there will be no changes to the trading
relationship between the UK and the EU, as the exit cannot be before Article
50 is invoked in March 2017 and is most unlikely to be before March 2019. The
low forecast for short-term growth probably results from the present
expectation of low fixed investment prior to the settlement of the exit
terms.
The long-term effect of leaving the EU will depend on what the trading terms
with EU27 are and what affect these changes have on the UK economy. The
determining factor will be the balance between trade destruction by leaving
the EU and trade creation outwith the EU. Changes in domestic investment and
FDI in the UK will be determined by the analysis of such likely trade patterns
which such investment will continue to reinforce iteratively.
The cumulative loss to GDP until 2021 on leaving the EU is significant. Ernst
and Young forecast, published in October 2016, the cumulative loss resulting
from lower UK Growth of GDP by 2030 at nearly 4.0%. Since then they have
revised upwards their relatively low forecast for 2016 and 2017 growth to 2.0%
and 0.9% respectively. Compared to the OBR's forecast, Ernst and Young
forecast 0.3% to 0.5% lower growth in GDP in each of the years until 2020,
when they forecast only 1.8% growth, well below the UK's long-term average
that the OBR expects. If Ernst and Young's forecast is upgraded by even 0.15%
each year for five years, conservatively less than the OBR figure, then the
resultant loss to GDP is 3.25%.
The estimated GDP loss is very damaging but much greater losses have occurred.
In the Great Recession of 2008 real GDP dropped by 5% over two years, a
contrast to a loss of a potential decrease of 3.5% over several years. A
greater thief of actual GDP growth compared to potential GDP has been the
significant reduction in productivity. In the eight years before the 2008
recession productivity rose 19% or about 2.35% per annum following a 20% rise
in the previous eight years. Since 2008 there has been virtually no rise in
productivity in the UK, and there has been a very large loss of potential GDP,
dwarfing the potential 3.25% loss over the next five years. Productivity may
seem less important than the loss of trading opportunities but as Paul
Krugman, the Nobel Laureate, says "productivity isn't everything, but in the
long run it is almost everything". More output per unit of input underlies
all economic advance.
The potential damage from whatever "Brexit" is agreed or, if not agreed,
occurs will be mitigated by any transition period. The longer the period the
more time is available to develop other trade links so that the economic cost
of the loss of trade with the EU can be compensated by the benefit of trade
elsewhere, such links taking many years to establish and develop. The UK did
not invoke Article 50 soon after the election, but the Government has said it
will do so in March 2017, probably as a result of political pressure, as the
date is entirely at the UK's discretion. But having invoked Article 50, the
initiative lies wholly with the EU27, all of those members would have to agree
to any extension. The EU chief negotiator, Mark Barnier, an experienced
French Minister and a senior EU official, was acutely aware of the shift in
the balance of power when he outlined the EU27 negotiating position in early
December: that Brexit talks would be a short negotiation lasting less than 18
months; that EU27 unity was the first over-riding priority; and that the final
deal would have to be worse than EU membership. Eighteen months is clearly an
unrealistic timetable to negotiate a change in more than part of the complex
web of relationships that the UK has with the EU, even if, and this is by no
means certain, the parties have a genuine desire to reach such a settlement.
M Barnier is adopting a strong negotiation position and setting rules,
timetables and intimating the restricted discretion available because of the
requirement for any agreement to be approved by all the 27 member states.
However, his position is very strong: the UK wish to leave the "Club"; the
institutional framework and the voting structure in the Club is very
unfavourable; the EU27 economy is considerably larger than the UK's and the
mutual economic damage from any trade disruption would be much lower per
person in the EU; the UK military and security "assets" will continue through
NATO and mutual interest; and, most importantly of all, the UK is not a "core"
member of the EU, is not a Eurozone member, does not have a cultural memory of
the domestic devastation of two world wars and unlike many EU nations does not
have a continuing reminder of successive defeat at the hands of German
economic strength and military power. Indeed, for the principal EU nations
the EU is a political organisation and the economic affiliations, of which the
major manifestation is the Euro, are primarily a means to achieving the
political goal. Thus, if there is an economic cost in negotiating the UK
Brexit, it is a small added price to pay in relation to the continuing costs
of existing politically oriented economic policies.
In general, the UK has never shared the identity of the common cause, "The
dream of Europa", the inspiration of many members of the EU. In short, for
the UK economics matters more than politics, but for the EU27 politics matters
more than economics, an unfortunate asymmetry for the UK. Unlike any previous
occasion the entire political construct is threatened by "Brexit". Brexit
strikes at the heart of Europa when she is already suffering from the
continuing instability of the "Club Med", particularly Italy; poor EZ economic
performance; the rise of populist and other anti EU groups in France, Italy,
Greece, Hungary and many other nations; and by separatist ambitions elsewhere,
notably Catalonia. Thus, to create significant exceptions or give special
treatment now to the UK would fuel the growing anti EU clamour and centrifugal
ambitions. As Hilaire Belloc said of Jim "and always keep ahold of Nurse, for
fearing of finding something worse", a somewhat tardy admonition in practice,
as the lion had already eaten all but poor Jim's head! The UK's Brexit is an
unprecedented attack on centralist EU aspirations and inflicts heavy
reputational damage on the concept. For the EU27, the political imperative of
maintaining at least the appearance of cohesion and not awakening Europa from
her dream outweigh economic considerations. The secondary importance of
economic considerations means the Brexit negotiations will not meet many of
the current UK expectations, and certainly not the UK's aspirations.
There are several possible models for the UK relationship post Brexit. Norway
has a relationship allowing unfettered access to the single market. Norway is
inside the Schengen area, allowing free movement, and any similar proposal for
the UK would be totally unacceptable to the electorate for whom immigration
control is a sine que non. Switzerland has a series of bilateral trade
agreements with the EU but like Norway has agreements on association with the
Schengen area which renders the Swiss model also unacceptable.
The communique issued by the EU27 following their immediate post referendum
summit confirmed that no relaxation of the EU principle of free movement would
be acceptable. This may seem non-negotiable, although the EU has been
notorious for extolling rigorous adherence to rules but then finding "fudges"
such as stopping the clock in CAP negotiations, allowing violations of
Maastricht rules by France and by Germany on the assimilation of East Germany,
suspending the free movement of capital to keep Greece in the EMU - if the
political risk is high enough, short-term expediency rules, but as the UK
would require an unacceptable long-term exception, such "fudging" is
unlikely.
The three possible options for the UK EU27 economic relationship are: (a) a
customs union similar to the 1995 EU-Turkey Ankara agreement; (b) a free trade
agreement similar to the EU-Canada Comprehensive Economic and Trade Agreement;
and, (c), a reversion to World Trade Organisation Rules. A customs union
would allow tariff free access inside the EU but would impose tariffs
externally as determined by the EU, including high agricultural tariffs, and
would of itself make no provision for services, the largest net UK export to
the EU. A FTA would be preferable to a Custom Union as it would allow free
imports from world goods markets, but it leaves all exports subject to
complicated rules of origin, possible border controls and financial services
prone to non-tariff barriers to which unfortunately they are especially
vulnerable. Such an agreement would be preferable to a Customs Union but, if
the current Canadian experience is a precedent, would take five to ten years
to enact.
When the UK leaves the EU, trading arrangements will be governed by WTO rules
of which the EU and all member states are members. This is the certain UK
default position which requires no EU27 ratification. However, given that
there are many aspects of the UK economic, political and strategic structures
that are attractive to the EU27, it seems likely that an enhanced WTO
arrangement will be made - this is the most likely option and one which might
allow mutually beneficial transitional arrangements. Such a compromise would
be economically favourable to the EU27 and would minimise further political
damage.
The default WTO position is calumniated as a residual default position to any
negotiations, and as a result the UK economy is considered likely to suffer a
decline in GDP compared to the status quo ante. However, the level of decline
is considered by the NIESR to be 2.5% in the short term and 2.7% in the long
term. These predicted falls are similar to Ernst and Young's forecast and are
lower than other estimates. Much more could be gained if the previous rate of
productivity was restored.
In the referendum the voters were not given impartial guidance on the forecast
likely cost of a "WTO Brexit" settlement to GDP, if such an assessment could
be made. Certainly, the record of the survey of economic forecasting as
demonstrated above would not place a high probability on such accuracy.
Unfortunately, often choices have to be made on the basis of similar great
uncertainty. The economic performance of the UK is impeded by many similarly
unquantified choices. These include regulations, social concerns, centrally
provided public services and goods, welfare and environmental and green
policies, regional industrial policies, planning regulations, cartels and
monopolies, and self-regulating professionals all which are considered,
probably rightly, should be delivered irrespective of the precise cost to
economic growth. Perhaps the cost of Brexit is a cost that the electorate are
prepared to pay, although it is a heavy one as the 2.5% loss is a continuing
year after year loss. Billie Bunter understood it well: if he missed a meal
he could never catch it up.
Restrictions of trade provide one of the main forecast costs of Brexit, but
the forecast costs may be overstated. Trade exports to the EU have declined
from a rate of 60% of all exports in 1990 to 44% in 2016 while exports
elsewhere have continued to expand. The effect of EU tariffs is likely to be
much lower than is often realised, as many high volume goods are subject to
tariffs of less than 3%.
The highest EU tariff falls on some agricultural products where they reach
18%, more than five times the weighted mean for manufactured products. EU
agriculture is a very highly protected industry of which tariff protection
provides only a part. The UK economy would gain considerably from the removal
of EU external tariffs as world agricultural prices are generally lower, and
UK agricultural income could be protected, as appropriate, through a much
cheaper reinstated UK agricultural policy. The range of tariffs on
manufactured products is wide - less than 1% for pharmaceuticals and oil and
fuel, rising to 6% for plastics and 10% for cars - but the weighted average is
3.24% and only 2.3% for industrial goods.
The effect of such tariffs for UK manufacturers on their sterling receipts is
greatly mitigated by the devaluation of sterling. Indeed, if the wholesale
prices in UK is 75% of the final EU27 retail price, then, assuming no
inflation of the UK manufacturer's import costs, the current devaluation of
the £ compensates for an increased tariff of as much as 10%. The UK currently
imports about £100bn more goods from the EU than it exports to it. Given the
relatively small tariff barrier and the massive sterling devaluation the
traded goods sector should not be severely damaged by adopting a WTO trading
system.
The services sector is a net exporter of about £20bn, of which the financial
sector has a net positive balance of about £17bn and the only significant net
negative balance is the travel industry where circa £10bn more was spent on
"travel" by the UK outside the UK than within the UK by EU27 travellers.
Brexit will not affect the travel industry and, given sterling's devaluation,
the net balance should decline.
The restriction in trade in the other service sectors is not related to
tariffs but primarily to regulation, licencing and controls; and the
individual service sectors in each EU27 country are still highly protected -
the much vaunted single market does not operate in these areas - and as John
Kay, possibly echoing the All-Party Parliamentary Group's conclusion "there is
no single market in services in any meaningful sense" says "for most services,
however, the single market remains an aspiration rather than reality". Thus
leaving the EU will be a greater opportunity cost than an existing cost for
most of the service industry. It seems very likely that a significant number
of the EU privileges of the financial sector will be withdrawn and that in
consequence administrative structures to meet the regulatory requirements of
the EU will have to be introduced. This will certainly result in some
existing non-UK institutions relocating some functions outside the UK and an
increased cost for UK institutions who decide to meet the changed regulatory
requirements. The competitive advantages of most service industries are
related to location, quality, convenience, inertia and habituation and skill
and, to a lesser extent, price, than the trade sector. For UK institutions
the costs of meeting foreign regulations will usually be not significant in
relation to the margins on the business transactions and the strategic
importance of providing a comprehensive service to clients. The contraction
of the service sectors, particularly the financial sector, will prove less
severe that many commentators contend, but margins may be reduced.
Scotland's economy has underperformed the UK economy for the last five years.
Forecasts for Scotland are lower than before the Leave vote, and in November
Mackay Consultants estimated growth in 2016 of 1.5% and forecast 1.2% for
2017. Mackay's 2017 forecast is lower than EY's 2.0%, but higher than the
Fraser of Allander's 0.5% and PWC's 0.3% whose forecasts', Tony Mackay says,
drolly but accurately, "have been very poor in recent years"!
Scotland's poorer economic prospects have four main causes. Scotland has a
proportionally larger public sector which, as evidenced in the Education PISA
results, has low productivity, Scotland is outside the higher growth area of
London and the South East, a difference that has become more marked since the
collapse of its two largest institutions, the RBS and the Bank of Scotland.
Fortunately, the skills training and aptitude necessary for the executive and
administrative functions remain and support the financial sector in Edinburgh
and Glasgow, but the strategic function has been diminished together with the
associated professional expertise.
Indy ref 2, as a possible second referendum is quaintly termed, detracts from
Scottish economic performance as it casts a shadow over investment in
Scotland, but this threat to economic progress is diminishing. The value of
prospective Scottish Government revenue from North Sea Oil and Gas is now so
small that the fiscal deficit of an independent Scotland would be about 10%,
comparable with Greece in the Great Recession. Such harsh reality is sapping
the SNP's exceptional ardour. Indeed, the widespread discussion of the
economic cost of Brexit may have drawn attention to the very considerably
greater cost to Scotland of a Sc-exit, given its closer economic ties to
England than the UK to the EU. If the UK with its own currency has difficulty
negotiating with the EU27, how much greater would the difficulty be for
Scotland negotiating with the UK? A separate, often unrecognised point, is
that if Scotland fears for its lack of influence over UK policy, how much less
influence will it have over the much larger and more different EU27 policy?
The November 2016 YouGov poll showed support for a 'Yes' vote was 44%, its
lowest poll since September 2014 when 45% voted Yes. This outcome was
surprising as commentators considered that a Brexit vote by the UK was
contrary to the Scottish vote to Remain and a preference for the EU would
provide a windfall for the SNP. John Curtice commented that "While some
people might have switched from No to Yes in the wake of Brexit, as the SNP
anticipated, there was also a risk that some people would switch from Yes to
No - for them, the prospect of being in a UK outside the EU becomes much more
attractive than a Scotland intent on remaining inside the EU". He estimates
that between a quarter and a third of people who voted Yes in September 2014
voted Leave in June 2016. Thus, a significant number of Yes and Leave voters
are deciding it's more important to be outside the EU than it is to be part of
an independent Scotland. John Curtice continued "Sturgeon's apparent
assumption was that Brexit would shake the apples off the tree in her
direction. In fact, some of the apples have gone in the other direction."
The oil industry is the fourth cause of Scotland's poor economic prospects as
its decline continues to damage the economy as new investment is reduced, long
cycle projects complete and damaged businesses continue to collapse. Existing
firms expect staff losses to be 33% by mid-2017. Oil prices have improved
recently and without doubt the nadir in oil prices has passed and the £
devaluation increases revenues from North Sea oil to the extent that costs are
not $ denominated. The OPEC agreement gives evidence of a new rapprochement
among Middle Eastern enemies who, in plain terms now "hate the effects of low
oil prices more than they hate each other" and have agreed to restrict supply
and have persuaded Russia and other countries to co-operate for mutual gain.
Incremental supply cuts are also taking place on a progressive basis as older
fields are depleted. Prior to 2015 non-OPEC fields declined at about 3% per
annum but, owing to low margins leading to lower capital investment, the
decline over the last two years has been about 5.75% per annum. In 2017
mature oil fields, will deliver 3.5m bpd less than in 2014. These reductions
in supply will take place as the IEA forecasts that demand for oil will grow
by about 1.2% a year for the next few years. However, as prices rise,
increased supply will become available at short notice from the very extensive
US shale interests where the breakeven price at the margin is $55 to $60 and
this increased supply will limit further price rises. Supply will be
maintained at most existing fields as they can be operated profitably at this
price although many may not make a return on sunk investment at that level.
The production cuts envisaged have increased the Brent Oil one month future
price by just over $10 to $55. However, the five-year futures price is only
$5 higher, indicating that little significant price change is expected in the
next five years. Nor is a change expected in the years beyond that as the
longest dated month, December 2024, is only $2 dearer … at $62.01! One
explanation for the low futures price is that US shale operators are selling
forward oil at prices sufficient to exploit their very considerable reserves
profitably. Like coal before oil, many owners of oil reserves already realise
that there are reserves that may never be realised - in truth some "jam today"
is much much better than "no jam tomorrow"!
Property Prospects
In the previous investment cycle the CBRE All Property Yield Index peaked at
7.4% in November 2001, then fell steadily to a trough of 4.8% in May 2007,
before rising in this cycle to a peak of 7.8% in February 2009, a yield
surpassed only twice since 1970, on brief occasions when the Bank Rate was
over 10%. Since then yields fell to 6.1% in 2011, rose by 0.2 percentage
points in 2012 and fell steadily to 5.4% in 2015 before rising to 5.5% this
year. Unlike the last two years' yields are unchanged in all components of
the Index except Retail Warehouses where the yield increased by 0.5% points to
5.7%. Significantly CBRE remark "Prime yields for All Property remained
relatively flat despite the uncertainty following the EU Referendum result in
Q3".
Yield changes within each component of the All Property Index have been small.
The main change has been an increase in yields in Central London prime
offices which in the last quarter rose by 17 bps to 4.4%, presumably in
response to an expected lower demand for London offices following the Brexit
vote. Yields fell very slightly in all "Southern" areas. Within Shops, yield
on Central London shops fell in the year to Q2 but rose 25 bp in Q3 and yields
increased in the "Rest of UK", but in Scotland fell by about 10 bps. Within
Industrials, yields in the East and West Midlands increased by about 25 bps,
presumably a reaction to the referendum vote in important manufacturing
centres.
The peak All Property yield of 7.8% in February 2009 was 4.6 percentage points
higher than the 10-year Gilt, then the widest "yield gap" since the series
began in 1972 and 1.4 percentage points wider than the previous record yield
gap in February 1999. The 2012 yield of 6.3% marked a record yield gap of 4.8
percentage points, due largely to the then exceptionally low 1.5% Gilt. The
yield gap fell to a low of 3.3% in 2014, but rose to 3.6% last year, due
mostly to a fall in gilt yields. This year a small rise in yields to 5.5% has
again been offset by a 0.3 percentage points fall in gilts to 1.5%, widening
the yield gap to 3.9%.
The All Property Rent Index, which apart from the brief fall in 2003, had
risen consistently since 1994, fell 0.1% in the quarter to August 2008 and
then fell by 12.3% in the year to August 2009. Since 2009 there have been
small increases of only 0.9%, 0.1% and 0.6% in the years to August 2012, but
since then rental growth has improved slightly by 2.6%, 2.9% and 5.0% in the
three years to 2015 and has risen by 4.6% this year for the first time to a
level above the previous peak attained in June 2008. Rent rises in the
individual sectors were 8.6% Shops, 6.1% Industrials, 4.5% Offices and around
1.5% Shopping Centres and Retail Warehouses, two sectors which also had the
lowest rent rises last year. Within the sectors the most notable changes,
computed before any effect of the referendum, have been a further large
increase of over 20% in Central London shops. Within Offices London City
offices rose over 20%, but there was little change in West End offices
although Suburban London, South-East and East offices all rose about 10%, but
rents changed little in all peripheral areas. Within Industrials the largest
increases were nearly 10% in London and about 6.0% in the South East. In all
other areas much smaller increases occurred. Since the depression began eight
years ago, the All Property Rent Index has risen by 2%; Shops by 3%; Offices
by 8%; Industrials by 9%, but Retail Warehouses have fallen by 16%. Since the
market peak of 1990/91 the CBRE rent indices, as adjusted by RPI for
inflation, have all fallen: All Property 28%; Offices 32%; Shops 18%; and
Industrials 31%.
Property returns as measured by IPD rose 2.9% in the year to October 2016, a
much poorer return than the 14.7% achieved last year, and the 20.1% in 2014.
Previous years' returns were 7.4%, 3.1%, 8.7%, 20.4% minus 14.0%, and minus
22.5% in the calendar year 2008 when in December alone the index fell a record
5.3%. The IPD income returns are approximately 5.0% per annum and changes in
returns are largely due to changes in capital values. Capital returns were 8%
in 2015 but in early 2016 the increase was only to 0.2% per month before
falling by 0.6% in March 2016 and then by over 2% in July, subsequent to the
Referendum when values, especially of London offices, fell sharply.
Forecasts for the full 2016 year and for 2017 and beyond have a notable
inflexion point depending which side of the June Referendum date they are
made. In August 2015 the IPF Survey Report forecast overall returns of 9.2%
in 2016, subsequently modified to 7.1% in May 2016. However, in August the
overall return was forecast at -0.4%, due primarily to a fall in capital
values of 5.3%. The IPF comment "This represents the largest quarter-on
quarter downward shift in total returns forecast by this survey to date. The
last occasion the consensus Forecasts recorded negative returns was in
November 2009 (of -2.6%) for that year being the eighth and final consecutive
quarter of sub-zero predictions for the then current year." IPF, to their
credit, confess the actual return for 2009, as shown by IPD, was plus 3.5%.
IPF forecast growth in capital values for 2018, 2019 and 2020 which, together
with an income return of just about 5.0%, gives returns of 5.7%, 6.8% and 7.1%
respectively. The total return forecast over the four years up to and
including 2020 is 3.9% per annum.
Colliers provide the most comprehensive surveyors' forecast, giving detailed
consideration to each sector. The near term forecast for 2016 is an All
Property return of -0.4%, similar to IPF but Colliers has a higher forecast of
2.4% for 2017 and of 4.6% for 2016-20. One source of variation may be that,
while the Colliers report was published in September, three months after the
referendum, the IPF forecasts were published in August having been collated up
to 12 weeks previously. In contrast Colliers say that data released "suggest
economic activity has shrugged off post-vote uncertainty". Colliers expect
the Industrial sector to give the highest return in 2017 at 6.5% and, over the
four years to 2020, 7.1% per annum. Rental growth will be higher in the
Industrial sector than in other sectors with the London and the South-East
areas continuing to have the greatest increases.
The Shops and Offices sectors are both expected to suffer capital declines
from rising yields in 2017 and from 2016 - 2020 with total returns of 2.3% at
0.3% respectively in 2017 and 4.1% and 3.8% for 2016 - 2020. Standard Shops
rents are expected to increase by 1.2% per annum in 2016 - 2020 but Shopping
Centres and Retail Warehouses will have lower rental growth and rents will
continue to fall for Supermarkets. Standard shop rents are expected to rise
more rapidly in Central London, but very small rental falls are expected
outwith the wider South-East region.
Forecasts for the office sector are broadly similar to the shop sector as
falling capital values reduce total returns to 0.3% in 2017 and 3.8% per annum
in 2016 - 2020. Brexit is expected to reduce demand from financial services
who currently account for about 24% of City office demand but there are large
requirements from media and tech firms who continue to take space and such
demand may partially offset falling demand from financial services. London
rents are expected to be stable at best in the second half of 2016 but to fall
in 2017, particularly in the City, by 5.0%, before recovering to grow by about
1% per annum from 2016 - 2020. In the South-East a similar trend is expected
with a lower amplitude. For the rest of the UK Colliers expects even more
modest rental growth of 0.5% in 2016 - 2020. This year rent rises have been
notable in Manchester, Swindon and Exeter but, in Scotland, not unexpectedly,
Aberdeen rents fell by 12.5%, while Edinburgh and Glasgow rents were unchanged
at £30 for grade A space.
Forecasters are notoriously unable to detect pivotal points such as the
unexpected Brexit vote which was largely responsible for the marked change in
the IPF forecasts from March 2016 to August 2016. Current forecasts are
essentially for a small continuing improvement from the present position - a
trend analysis. However economic growth is forecast by the OBR at 1.4% in
2017 and rising thereafter, no recession is premised, and the initial response
by the economy appears much less disadvantageous than previously feared. I
think that, in general, returns over the 2016 - 2020 period will be above
those currently forecast.
This time last year forecasts for house prices in 2016 were optimistic. HMT's
"Average of Forecasts" was for a rise of 6.1%, and the OBR forecast 6.8%,
figures in line with current estimates of 5.0% by the HMT survey and 7.8% by
the OBR. Increases in house prices in the twelve months to the end of October
2016 are reported as: 6.1% Halifax; 4.7% Nationwide; and 3.0% Acadata, or 3.6%
excluding London and the South-East. The Acadata index includes cash
purchases excluded from the Mortgage providers' figures. The downturn has
been more severe in London than most regions, and as a higher percentage of
houses are bought with cash in London, rises reported in the Acadata index are
reduced compared to those indices excluding cash buyers.
The average annual figures mask a wide disparity over time and among the
regions of England and Wales. Acadata report that prices rose by 0.4% in the
month of October, a modest increase but the largest since 2.1% in February
2016, prior to the introduction of the 3% stamp duty surcharge on investment
properties and on second homes, and the subsequent June Brexit vote. The
annual price change in October was 3.0%, a sharp reduction from the 9.1%
reported in February. In February Greater London had the highest house price
growth but currently growth is lower there than every region except Wales and
Yorkshire and Humberside.
It is considered that there is a high positive correlation between house price
rises and transaction volumes. Certainly, this year transactions peaked at
120,000 in March and since then have been 5,000 to 10,000 lower than in 2015
and 2014 and in October were 10,000 to 20,000 lower than in the last three
years. In Q3 Greater London transactions were 32% lower than in 2015, more
than double the percentage drop of 14% for all England and Wales, a result
consistent with Greater London having the lowest increase in price of any
major English region. For 15 of the last 21 years sales have been higher in
October than in September, but the October 2016 sales are about 12% lower, a
change Acadata consider may be a continuing one off effect of Brexit or
indicative of a longer term trend from ownership to renting.
There continues to be a great disparity in price rises among the regions,
marked by the relegation of Greater London to one of three regions, together
with Wales and Yorkshire and Humberside, with less than 1.0% growth. The
three regions with the highest annual growth are East of England 7.0%, South
East 6.5% and South West 4.7%.
Interpretation of the changes in prices is complicated by the differing
reported results among the reporting agencies. The largest difference is
currently between the band of 3.0% to 4.6% annual price rises comprising
Acadata and the mortgage providers, together with Rightmove, and the new ONS,
which returns a rise of 9.0%. The difference occurs because ONS uses a
geometric mean whereas all the other providers use an arithmetic mean. The
geometric index gives a reduced weighting of high value properties compared to
the arithmetic mean, and in consequence, the fall of central London high
prices is under-reported by the geometric based ONS system.
In Scotland house prices remain "resilient" according to Acadata, increasing
by 2.4% in the year to August 2016, a higher rate than the 0.3% recorded to
August 2015. The average prices are distorted by a reduction in the number of
houses over £500,000 sold this year. Sales of high priced houses were brought
forward to early 2015 to avoid the penal 10% LBTT for the £325,000 to £750,000
band and 12% thereafter. Throughout Scotland 31% fewer such houses were sold
in H1 2016 than in H1 2015, the largest number 115, and the highest percentage
of such sales, being in Edinburgh, causing the current average Edinburgh sales
price to be depressed compared to last year. In Scotland a £1m house now
costs £78,350 in LBTT but "only" £43,750 in SDLT in England and Wales, a
difference in tax of £34,600.
The Registers of Scotland provide detailed figures up to Q3 2016. Within
mainland Scotland the largest rise in price occurred in East Renfrewshire
where a large number of new expensive houses were sold in Newton Mearns.
Edinburgh recorded the second highest rise of 5.7%, and Aberdeen City recorded
the largest fall of 7.5% as detached houses there fell 14.6%. In Edinburgh
flats rose by 8.0% and anecdotal evidence indicates that price rises are very
strong for refurbished flats and new flats. New flats, even those peripheral
to the established residential areas, are obtaining prices of £340/ft2 to
£360/ft2, a rise of probably over 15% compared to last year. Agents report a
strong and continuing market for such properties.
The OBR expect house prices to rise by 3.4% in 2017 and by 28.5% over the next
six years. HMT expect prices to rise 2.2% in 2017 and then by about 10.6%
over the following three years. Forecasts of nil or 1% for 2017 are given by
JLL, Savills and Knight Frank, RICS expects price rises to be 1.5% in 2017 and
around 20% over the next five years.
Savills provide house price forecasts, carefully distinguishing them as
second-hand, for up to five years for both Prime and Mainstream markets. The
forecasts are very conservative compared to this time last year as "rarely, if
ever, has economic forecasting been less certain. The myriad of Brexit
outcomes …". The Mainstream UK market is forecast to have no growth in 2017
and to grow by only 13% over five years. Scottish prices are reported to fall
2.5% next year and to grow only 9% in five years, lower than any other UK
market. Savills consider that in 2017 household income, a good indicator of
house price movement, will grow only 1%, less than inflation, and that
employment will decrease by 0.4%. Aberdeen will continue to be a "drag" on
the national figure unless oil prices rebound.
According to Savills prime markets will perform equally poorly in 2017 but
grow strongly in 2019 and increase in Central London and Commuting areas up by
about 20%. Scotland's prime market is expected to perform least well of all
the regions and prices to rise only 12% over five years.
Savills compare prices in July 2016 with peak prices in 2007/08. Prices in
all areas north of the Midlands and in Wales have fallen and by 6% in
Scotland, but South-East and East regions have risen over 20%. London, a
class alone, has risen 58%.
The Halifax index peaked at the £199,600 recorded in August 2007. The
equivalent inflation-adjusted price in October 2016 would have been 27.89%
higher, or £255,259 but the current October 2016 Halifax index price is
£217,411 - a long way off! If house prices rise at about 3.5% and inflation
is 2.0%, then ten more years will elapse before the August 2007 peak is
regained in real terms. House prices are difficult to predict and
historically errors have been large, especially around the timings of
reversals or shocks. I repeat what I said last year and previously. "… the
key determinant of the long-term housing market will be a shortage in supply,
resulting in high prices".
Future Progress
The Group is starting to take advantage of a housing market which is stable in
the Scottish Central belt and which I expect to remain stable over the next
few years.
We will continue to invest in projects that require long-term planning work,
but on a reduced scale. We will emphasise the completion and realisation of
previously postponed development opportunities which can be built and marketed
shortly, provided market conditions allow. We will seek to develop our major
sites with the necessary consents and, for the largest projects, continue our
analysis of innovative financial methods and joint ventures as appropriate.
While we do require a stable and liquid housing market, we do not depend on a
recovery in prices for the successful development of most of our sites, as
almost all of these sites were purchased unconditionally, ie without planning
permission, for prices not far above their existing use value and before the
2007 house price peak. A major component of the Group's site development
value lies in securing planning permission, and in its extent, and it is
relatively independent of changes in house values. For development or trading
properties, unlike investment properties, no change is made to the Group's
balance sheet even when improved development values have been obtained.
Naturally, however, the balance sheet will reflect such enhanced value when
the properties are developed or sold.
The policy of the Group will continue to be considered and conservative, but
responsive to market conditions and opportunistic. The mid-market share price
on 21 December 2016 was 85.5p, a not insignificant discount to the NAV of
152.88p as at 30 June 2016. The Board does not recommend a final dividend,
but intends to restore dividends when profitability and consideration for
other opportunities and obligations permit.
Conclusion
The UK recovered from the Great Recession of 2008 and the longest depression
since 1873-96 but growth since then, although restored to nearly the normal
trend level, has been poor, while unusually there has been no rebound of above
average growth after the recession, or "catch up".
The continuing restrictive fiscal policies have delayed a return to the
pre-recession growth level and the long depression and credit controls have
damaged the economy's productivity and its long-term supply capability. The
opportunity to expand demand and to invest in capital projects at low interest
cost has been neglected contributing to the virtual stagnation of productivity
growth. A fiscal stimulus without an improvement in productivity may threaten
the inflation target. Fortunately, at long last, the view is gaining credence
that the inflation level is "the inflation level" but it is not the "holy
grail" of economic management nor even a necessary pre-condition for a
successful growing economy, but one of many target indicators. The crisis in
the EZ is a more obvious example of the consequences of such misplaced
emphasis.
The management of the economy, the inflation target, the fiscal balance, the
"golden rules" are derived from forecasts based on economic modelling. Such
forecasting has proved fallible, at times contributing to, if not causing,
severe economic damage. Past examples include the Great Depression, the
policies before the New Deal, the recent Great Recession, the EMU, including
particularly the extensive UK lobbying to join the EZ, the now waning fixation
with the inflation target, and most recently and, quite vividly, the forecast
short term consequences of a proposal to leave the EU. Patently, forecasting
will always be imprecise, but experiments on refining their accuracy has shown
that the skills of experts in their own fields are not the skills required for
more accurate forecasting. Returns from investing in defining, isolating and
using these skills and techniques would be high.
Forecasts for the final relationship between the UK and the EU and for the
economic consequences require to be considered in the knowledge of the
uncertainties of such forecasts. My forecast is the economic penalty for
withdrawing from the EU will be measurable but manageable. This political
choice is but one of many that may not be economically optimal - perhaps
economists should accept that at the margin sometimes other priorities are
preferred. This might even improve their forecasting.
I D Lowe
Chairman
22 December 2016
Consolidated income statementfor the year ended 30 June 2016
2016 2015
Note £000 £000
Revenue
Revenue from development property sales 438 440
Gross rental income 351 334
Property charges (241) (224)
Net rental and related income 548 550
Cost of development property sales (391) (272)
Administrative expenses (635) (726)
Other income 15 28
Net operating loss before investment property
disposals and valuation movements 5 (463) (420)
Gain on sale of investment propertiesValuation gains on investment properties 99675 -1,100
Valuation losses on investment properties (185) -
Net valuation gains on investment properties 589 1,100
Operating profit 126 680
Financial income 7 1 1
Financial expenses 7 (22) (116)
Net financing costs (21) (115)
Profit before taxation 105 565
Income tax 8 - -
Profit for the financial period attributable to equity
holders of the Company 105 565
Profit per share
Basic and diluted profit per share (pence) 9 0.89p 4.79p
The notes on pages 30 - 49 form an integral part of these financial
statements.
Consolidated balance sheet as at 30 June 2016
2016 2015
Note £000 £000
Non current assets
Investment property 10 10,905 10,515
Property, plant and equipment 11 15 24
Investments 12 1 1
Total non-current assets 10,921 10,540
Current assets
Trading properties 13 11,166 11,418
Trade and other receivables 14 153 96
Cash and cash equivalents 15 103 131
Total current assets 11,422 11,645
Total assets 22,343 22,185
Current liabilities
Trade and other payables 16 (698) (645)
Interest bearing loans and borrowings 17 - (3,530)
Total current liabilitiesNon current liabilitiesInterest bearing loans and borrowings 17 (698) (3,630) (4,175) (100)
Total liabilities (4,328) (4,275)
Net assets 18,015 17,910
Equity
Issued share capital 21 2,357 2,357
Capital redemption reserve 22 175 175
Share premium account 22 2,745 2,745
Retained earnings 12,738 12,633
Total equity attributable to equity holders of the parent Company 18,015 17,910
NET ASSET VALUE PER SHARE 152.88p
151.99p
The financial statements were approved by the board of directors on 22
December 2016 and signed on its behalf by:
ID Lowe
Director
The notes on pages 30 -49 form an integral part of these financial
statements.
Consolidated statement of changes in equity as at 30 June 2016
Share Capital Share Retained
capital redemption premium earnings Total
reserve account
£000 £000 £000 £000 £000
At 1 July 2015 2,357 175 2,745 12,633 17,910
Profit for the year - - - 105 105
______ ______ ______ ______ ______
At 30 June 2016 2,357 175 2,745 12,738 18,015
====== ====== ====== ====== ======
At 1 July 2014 2,357 175 2,745 12,068 17,345
Profit for the year - - - 565 565
______ ______ ______ ______ ______
At 30 June 2015 2,357 175 2,745 12,633 17,910
====== ====== ====== ====== ======
Consolidated cash flow statement for the year ended 30 June 2016
2016 2015
£000 £000
Cash flows from operating activities
Profit for the year 105 565
Adjustments for :
Gain on sale of investment property (99) -
Gains on revaluation of investment property (490) (1,100) )
Depreciation 11 14
Net finance expense 22 116
_______ _______
Operating cash flows before movements
in working capital (451) (405)
Decrease in trading properties 252 80
(Increase) in trade and other receivables (57) (29)
Increase in trade and other payables 30 3
_______ _______
Cash absorbed by the operations (226) (351)
Interest received 1 1
_______ _______
Net cash outflow from operating activities (225) (350)
_______ _______
Investing activitiesProceeds from sale of investment property 199 -
Acquisition of property, plant and equipment (2) (3)
_______ _______
Cash flows from investing activities 197 (3)
_______ _______
Increase in borrowings -_______ 450_______
Cash flows from financing activities - 450
_______ _______
Net increase in cash and cash equivalents (28) 97
Cash and cash equivalents at beginning of year 131 34
_______ _______
Cash and cash equivalents at end of year 103 131
Notes to the consolidated financial statements as at 30 June 2016
1 Reporting entity
Caledonian Trust PLC is a company domiciled in the United Kingdom. The
consolidated financial statements of the Company for the year ended 30 June
2016 comprise the Company and its subsidiaries as listed in note 8 in the
parent Company's financial statements (together referred to as "the Group").
The Group's principal activities are the holding of property for both
investment and development purposes.
2 Statement of Compliance
The Group financial statements have been prepared and approved by the
directors in
- More to follow, for following part double click ID:nRSW7351ScRecent news on Caledonian Trust
See all newsREG - AIM Caledonian Trust PLC - Cancellation - Caledonian Trust plc
AnnouncementREG - Caledonian Trust PLC - Result of General Meeting
AnnouncementREG - Caledonian Trust PLC - Proposed cancellation of trading on AIM
AnnouncementREG - Caledonian Trust PLC - Unaudited interim results
AnnouncementREG - Caledonian Trust PLC - Result of annual general meeting
Announcement