Europe real estate market update—20 July 2020
- July 20, 2020
Real Estate | London
After a record 20.4% monthly contraction in UK GDP in April, the expectation was that with some businesses able to reopen under strict conditions in May, there would have been a solid rebound in output.
The consensus expectation was for a growth of 5.5% month-on-month. However, GDP data released this week showed that optimism was misplaced, as the economy grew just 1.8% month-on-month and contracted 24% compared to the same period last year.
While many manufacturing and construction firms restarted work, most of the service sector remained shuttered, resulting in only a mild pickup in activity with a rise of only 0.9% month-on-month in May after a 18.9% decline in April. Sterling tumbled by over 1% against the USD following data over concerns that a no-deal Brexit coupled with a lackluster recovery will leave the UK economy lagging other G10 countries for years to come.
The direction of inflation in the UK is a hotly debated topic – with much disagreement among economists as to whether COVID-19, and the policy response, will be a deflationary event or inflationary. What we do know is that the short-term data is not wholly representative given the change in buying patterns and consumer consumption during lockdown. The Consumer Price Index unexpectedly ticked up to 0.6% in June, a slight increase from 0.5% in May, mainly driven by higher prices for games and clothing, despite most items that contribute towards the CPI index showing disinflation.
Further, the recent cut in the VAT rate for the hospitality sector, and the Chancellor’s discount voucher for meals out, will have an impact on inflation through the summer months – some estimates indicating it could fall by 0.7 - 0.9 ppts – taking it just below zero. There is no expectation that inflationary pressures will start to build in the coming 12-24 months.
Headline data on the labour market shows that unemployment is stable, with the rate unchanged at 3.9% in the three months to April. However, given the number of workers still on furlough, nine million workers are still being paid by the state, and adding in those self-employed who are also still on government schemes, this is around 35% of the UK’s total workforce. Until these schemes are completely wound down, the true picture of the labour market is being masked. Forecasts for unemployment range from 7% to 12% by mid-2021.
In the European markets, the ECB has taken drastic action to provide significant amounts of liquidity and cheap financing to Eurozone banks which seems to be having the right impact. The policy has also successfully narrowed the spread between the borrowing costs for Germany and more heavily indebted nations from as high as 300 bps in March to 180 bps in July. Having almost doubled the size of their Pandemic Emergency Purchase Program at their last meeting, the ECB confirmed at its monetary policy meeting held on Thursday 16 July that they are in no hurry to change policy and increase their stimulus package. As expected the ECB kept borrowing rates at 0.00% and the deposit at -0.50%. Rates are expected to remain at the current levels until there is a clear and sustained increase in inflation toward their target of close to 2%. While it is far from a case of job done for the central bank, the pressure is now on the Eurozone’s politicians to agree on a fiscal stimulus package to boost the bloc’s economy.
Early this month, Sweden’s central bank, the Riksbank, kept its interest rate unchanged at 0% which is expected to remain unchanged until 2023. The Riksbank was the first among the five central banks (the ECB, the Danish NationalBank, the Swiss National Bank, and the Bank of Japan) to introduce negative rates in 2015, setting the repurchase rate to -0.50%. The Riksbank was also the first to reverse its decision and re-entered positive territory in December 2019 citing the potential long-term behavioural change of economic agents and the associated negative effects. Whilst it is still too early to assess the impact of negative rates on Sweden’s economy, central banks and economists around the world will undoubtedly be watching very carefully.
One topic which was the dominant headline, but has been sidelined by COVID-19, is the status of Brexit negotiations. A number of differences remain between the UK and EU, with little progress made in the latest round of negotiations. The fifth round begins this week ahead of a short summer recess until 17 August when the next round begins. Last month, the UK’s top Brexit Official, Michael Grove, confirmed that the UK will not be asking for more time to reach a deal with the EU.
Please feel free to reach out to your Chatham representative if you'd like to further evaluate the availability and suitability of such a transaction.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.20-0231
Our featured insights
The major U.S. equity indices moved higher for the week amid stimulus bill negotiations on Capitol Hill, rising tensions between the U.S. and China, and a deluge of economic data releases.
In reviewing what has transpired in the commercial real estate (CRE) lending markets over the past six months, we found it helpful to re-read our market commentary as it was written at the end of each of the last three quarters.
Now that we’re halfway through 2020, let’s examine how we got here and what the second half of the year might bring.
Considerations around risk management and hedging start with the economic factors. But REITs (as SEC filers) applying U.S. GAAP accounting must also contemplate the financial reporting ramifications of their hedging decisions.
Despite the disruption caused by the COVID-19 pandemic, the UK Financial Conduct Authority is still advising all market participants to prepare for a discontinuation of LIBOR at the end of 2021.
This summarizes the impacts that COVID-19 has had on repo markets and SOFR, how market participants have responded, and the possible implications of the economic slowdown on the LIBOR-SOFR transition.
For borrowers not facing immediate liquidity constraints, the current interest rate environment presents a compelling opportunity to restructure swaps to a lower coupon and longer duration.
Interest rate swaps are highly customizable and negotiable, and lend themselves to restructuring. This flexibility enables a cash-constrained borrower to amend and temporarily reduce payments.