BRITISH GRI 2011 INVESTORS AND DEVELOPERS IN UK REAL ESTATE.
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Transcript of BRITISH GRI 2011 INVESTORS AND DEVELOPERS IN UK REAL ESTATE.
BRITISHGRI2011
INVESTORS AND DEVELOPERS IN UK REAL ESTATE
Deutsche Bank
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010
George Buckley, Chief UK [email protected] +44 20 7545 1372
UK Economics:A bumpy ride
British GRI Conference, 11 May 2011
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
3
The UK recovery has been disappointing, compared to both the past and other G7 countries; history has proved that rebounds often happen, but that recoveries are volatile (as Q4 2010/Q1 2011 illustrate)
Sources: Haver Analytics, ONS, Bank of England, Deutsche Bank
A volatile and disappointing recovery
0
1
2
3
4
5
6
1832
1837
1842
1847
1850
1867
1879
1885
1893
1900
1903
1908
1921
1926
1931
1947
1975
1981
1991
Average growth (% yoy) in GDP in the twoyears following the last annual fall
LR avg
88
90
92
94
96
98
100
102
2006 2007 2008 2009 2010 2011
CAN FRAGER ITAJ AP UKUS
GDP levels, peak = 100
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
4
Sources: OECD, Reinhart & Rogoff (2010), ONS, IDS, Deutsche Bank
The downside risks to our growth forecasts
High debt & weak household incomes pose key downside risks to the outlook
-25
0
25
50
75
100
125
150
175
IT GE FR J P US CA UK
Levels
pp change since 97
Household liabiliies, % nominal disposableincome (2008 figures)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Below 30% 30-60% 60-90% 90% & above
Mean
Median
Real GDP growth (% yoy), advancedeconomies 1790-2009, by govt debtbrackets (% of GDP) - Reinhart & Rogoff
1
2
3
4
-3
-2
-1
0
1
2
3
4
5
6
2004 2006 2008 2010
RPI headline, % yoy (lhs)
IDS pay settlements, % yoy (rhs)
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
5
Sources: Bank of England, ONS, Haver Analytics, JP Morgan, Deutsche Bank
The key upside risks to our growth forecasts
-4
-3
-2
-1
0
1
2
3
4
5
6
70
75
80
85
90
95
100
105
1999 2001 2003 2005 2007 2009 2011
Sterling trade weighted (lhs)
Real trade weighted (lhs)
Official interest rates % (rhs)
Real official interest rates % (rhs)
-6
-4
-2
0
2
4
6
8
-8
-6
-4
-2
0
2
4
6
1988 1991 1994 1997 2000 2003 2006 2009
Credit impulse (net lending/GDP, yoy change (lhs)
Real GDP, % yoy (rhs)
Both series 2qma
Forecast based on unchanged net lendingand 1% qoq nominal GDP growth
The stimulus – rates, QE and sterling – has been huge, and the drag on GDP growth from credit should dissipate going forward
Year 1Income £100Pay down debt £40Left to spend £60
Year 2 £100 £20 £80 Spending up a third, but
we are still “de-leveraging”
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
6
Sources: Haver Analytics, ONS, Consensus Economics, Deutsche Bank
Inflation surprises
Just over a year ago the BoE had been expecting that inflation would fall below 1% in the first quarter of 2011. Commodity prices, the impact of lower sterling and tax rises have proved them wrong
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2010 2011
2010
2011
Evolution of Consensus Forecastsfor UK CPI inflation, %
-1
0
1
2
3
4
UK CAN EUR US SWI J PN
Latest core inflationreading, % yoy
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
7
Sources: ONS, Haver Analytics, Bloomberg, Deutsche Bank
Explaining sticky inflation: price level effects
There have been a number of external, exogenous, one-off price level effects that have pushed inflation higher: in particular, sterling, commodity prices & taxes
-4
-2
0
2
4
6
8
10
-40
-30
-20
-10
0
10
20
30
40
50
2001 2003 2005 2007 2009 2011
£ commodity prices (lhs)Headline input prices (lhs)Headline output prices (rhs)CPI (rhs)
% yoy rates
0
1
2
3
4
5
6
2004 2005 2006 2007 2008 2009 2010 2011
CPI ex indirect taxes
CPI headline
Rates of inflation, % yoy
-4
-2
0
2
4
6
8
1997 1999 2001 2003 2005 2007 2009 2011
Core goodsServicesOverall CPI
CPI inflation, % yoy
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
8
There is a lot of variation between estimates of the output gap. Even if we were certain of the size of the output gap, it may impart less downward pressure on inflation than in the past
Sources: IMF, OECD, CBI, ONS, Haver Analytics, Deutsche Bank
What role is the output gap playing?
05
101520253035404550556065
1960 1970 1980 1990 2000 2010
UK
US
Openness (X+M as % of GDP)30
40
50
60
70
80
90-7-6-5-4-3-2-1012345
1980 1985 1990 1995 2000 2005 2010
OECD output gap, % (lhs)IMF output gap, % (lhs)CBI % firms below capacity, % (rhs)
Invertedaxis
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
9
BoE Governor Mervyn King has argued that price level effects should be accommodated, but that second round effects – higher inflation expectations and wage pressures – should not
Sources: Factiva, Consensus Economics, ONS, Deutsche Bank
Inflation expectations: questions about credibility
1.75
2.00
2.25
2.50
2.75
2005 2006 2007 2008 2009 2010 2011
UK
Euro
Consensus Forecasts, projections for inflation 6-10 years ahead, % yoy(as at October each year)
0
1
2
3
4
5
6
7
0
50
100
150
200
250
300
350
2008 2009 2010 2011
Factiva search hits for 'BoE' & 'credibility' & 'inflation' (lhs)
CPI inflation % yoy (rhs)
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
10
Sources: Halifax, Nationwide, ONS, S&P Case-Shiller, BEA, DCLG, Deutsche Bank
Nominal house price fall forecast for 2011
Whether it’s compared to past history or other countries, the downward correction to house prices does not look to have run its course yet
60
65
70
75
80
85
90
95
100
105
-12 0 12 24 36 48 60 72
Late 1980s/early 1990s adjustment
Current adjustment
Months after/before peak
Real house prices (peak=100)
50
100
150
200
250
1987 1990 1993 1996 1999 2002 2005 2008
US (S&P Case Shiller)
UK (Halifax)
Real house price indices, 1987=100
31%
0
20
40
60
80
100
120
1970 1975 1980 1985 1990 1995 2000 2005 2010
Real UK house prices2005 Q1 = 100
+73%
-34%
+30%
-14%
+100%
-31%
+164%
-16%
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
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Sources: CML, DCLG, ONS, Deutsche Bank
Average affordability is not an encouraging sign
10
20
30
40
50
19691973197719811985198919931997200120052009
Mortgage repayments/disposable income ratio, %
Long-runaverage
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
12
Latest plans are for the coalition government to cut the structural deficit from 8.9% to 0.5% of GDP over the parliament - a significant acceleration relative to the previous government’s deficit reduction programme
Sources: OECD, HM Treasury, OBR, ONS, Bloomberg, Deutsche Bank
Coalition plans to reduce the deficit
-2
0
2
4
6
8
10
12
71-7
2
75-7
6
79-8
0
83-8
4
87-8
8
91-9
2
95-9
6
99-0
0
03-0
4
07-0
8
11-1
2
15-1
6
Deficit outturns and OBR forecastsBars are structural, line is total, % of GDP
Fcast
30
35
40
45
50
55
60
FRA
BE
L
AU
S
ITA
UK
EU
R
GR
E
PO
R
GE
R
SP
A
CA
N US
JPN
AU
SL
Total governmentoutlays, % of GDP
-1
0
1
2
3
4
5
6
7
8
2008 2009 2010 2011
UKSpainIrelandItalyPortugal
Spreads to bunds(10Y govvies, %)
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
13
Real government spending is expected to fall by 1.3% per year on average from 2011-15. The direct effect of this will be to knock 0.8pp off the annual rate of GDP growth. Nominal spending, however, does not fall in any year of the forecast horizon
Sources: OECD, HM Treasury, OBR, ONS, Deutsche Bank
The outlook for government spending
Average growth1982-1983 = 3.0%
Average growth1994-1999 = 3.5%
-10
-8
-6
-4
-2
0
2
4
6
8
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Cyclically adjusted primary balance, % GDPGDP % yoy
600
625
650
675
700
725
750
775
08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16
Total managed expenditure, £bn
Grey lines are previous forecasts in 2009 & 2010; dark blue line Mar 2011
-3
-2
-1
0
1
2
3
4
2000 2002 2004 2006 2008 2010 2012 2014
OBR forecasts(average 2011-15 = -1.3%)
Real government spending, % yoy(average 2000-10 = +2.2%)
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
14
• Recovery has been muted• Euro area/commodities/N Africa/Japan risks
Why waiting might be better
• The recovery continues
• Headline and core inflation shockingly high
• Inflation expectations have risen
Justifying an early move
Sources: Bank of England, Markit, Bloomberg, ICAP, Deutsche Bank
• Policy is at “emergency” setting
DB: Rates to rise in August, but risks of further delay
• Risks of fiscal-induced double-dip
• Inflation could fall more quickly
-1.75
-1.50
-1.25
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
35
40
45
50
55
60
1998 2000 2002 2004 2006 2008 2010
Whole economy PMI (lhs)
Rate changes, % (rhs)
Avg cut level
Avg hike level
0.250
0.375
0.500
0.625
0.750
0.875
1.000
1.125
M J J A S O N D J F M A M J
SONIA rates at BoE meeting dates, % (grey shaded bars show when rate hikes are fullypriced)
George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank
15
The End
Questions?
BRITISHGRI2011
INVESTORS AND DEVELOPERS IN UK REAL ESTATE