The World Economic Forum in Davos always has a distinct theme. Last year, economists released rafts of forecasts on the eve of the event showing the global economy was barreling towards a recession. Was 2023 going to be bad, or very bad?
This year it felt different. Fine, we don't know whether major central banks will cut rates four or six times. We don't know if they'll begin cutting in spring or summer. And all of this could be jeopardized by some as yet unforeseen event, but CEOs in the Swiss alpine town were all singing from the same hymn sheet:
"The expectation that interest rates are going down is creating animal spirits again,” Blackstone CEO Steve Schwarzman told Bloomberg TV last week. "The recession fears are gone, interest rates are coming down almost certainly very soon, so I think you’ll see a lot more M&A activity and a lot more private equity activity,” Carlyle co-founder and co-chairman David Rubenstein said later the same day. “Sellers have conceded to lower valuations and the pressure to meet a certain return on investment is ticking,” KKR co-head of global private equity Pete Stavros told the FT.
The outlook is giving decision-makers the confidence to act, but a lot of this is down to the capitulation of investors that had been holding on to assets by their fingernails. Business leaders clearly take the view that 2024 will be the year that the yawning mismatch in expectations between buyers and sellers will close. That should transfer across various sectors and will undoubtedly be good for commercial real estate transaction volumes.
Tax Cuts
Among the Conservatives' best shots at closing a gap in the polls will come in March when chancellor Jeremy Hunt delivers his spring Budget.
The chancellor has been dropping hints that the public finances are in decent enough shape to issue major tax cuts, and sure enough official figures published yesterday showed the government borrowed £5 billion less than the Office for Budget Responsibility thought it would in the first nine months of the financial year. The chancellor is thought to be weighing up whether to abolish inheritance tax or adjust income tax, according to the Telegraph.
Speculation as to whether Mr. Hunt will reform stamp duty has been underway since at least the autumn. Paul Johnson, director at the influential Institute for Fiscal Studies, outlined on Monday why cutting stamp duty would be his first move if he were chancellor: "it is among our worst and most damaging taxes; it gums up the housing market, keeps people who don’t need them in houses that are too big for them, thus reducing the supply available to growing families; and it serves to reduce labor mobility."
Still, reform is politically difficult, in-part because the "eye-wateringly high rates on more expensive properties" would seem like a giveaway to the nation's wealthiest individuals, he concludes.
Future gazing
From shopping to working habits, many aspects of our lifestyles have been transformed by technological developments. Tech tends to move quickly - ChatGPT acquired 100 million users in a few months - but our physical world tends to take some time to catch up.
Real estate and infrastructure take time to build, and knowing when and how to react presents investors with massive opportunities. Claire Williams looks at how technology is shaping demand in the industrial sector in Knight Frank's annual Future Gazing report. Shifts in lifestyles, shopping habits, population and trade dynamics, and attitudes towards the environment are altering the demands on the sector, both in the quantum of space required, as well as the locations, sizes and types of space needed.
Supporting the forecast growth of the retail, manufacturing and service segments of the market, for example, will require an additional 111.6 million sq ft of industrial and logistics space over the next five years. That could rise to 225.7 million sq ft if other segments grow at the same rate. See the report, linked above, for more.
Farmland
The value of UK agricultural land hit a new record during the final months of 2023.
The Knight Frank Farmland Index, which tracks the value of bare land (no houses or buildings) in England and Wales, rose 2% in the final quarter of the year to break the £9,000/acre barrier for the first time. On an annual basis average farmland values increased by 7%, a performance that only gold could match.
A lack of supply and continued strong demand from a wide variety of buyers helped support values, despite high inflation, rising borrowing rates, weak commodity markets and a drop in farm subsidies, writes Andrew Shirley.
The volume of farmland advertised publicly did rise by 15% during the year, but the total acreage for sale was still well below 100,000 acres, which is historically very low. There have been few large blocks of bare land put up for sale and those that have hit the market have generally created competitive bidding with prices reaching as high as £20,000/acre. Buyers have often been wealthy local landowners competing with tax-motivated farmers. Environmentally motivated buyers have also been in the mix, but have secured relatively few large purchases.
In other news...
Mortgage rates head below 4% as political rifts widen - see the latest update from Tom Bill.
Elsewhere - City of London remains top global financial center in own survey (Reuters), Bank of England may start cutting interest rates in Q2 as inflation eases, according to poll (Reuters), household disposable income at its highest in two years (Times), and finally, anti-EU populists poised to dominate in European elections (Times).
