In the second of his three-part series on this important topic, Paul Wilson takes a long hard look at how and when decisions have been made as the UK Government attempts to deal with the effects of the global pandemic and also how effective these measures have been. This month he looks at unforeseen and unintended consequences.
Is it too early to write a financial history of Covid-19? `The ‘second wave’ is hitting and many argue we are not yet halfway through. Think of the first wave as the first cycle of the pandemic, we know that if there is a successful vaccine deployment we may be limited to just two waves of destruction making this a story of two halves. However, it is possible if not probable that no effective vaccine will emerge and there will be many waves to endure.
Each wave is an economic event in its own right, altering the course of the economy, draining resources and upsetting the dynamic balance of the economy both in the direct effects of the virus on economic activity, but also the consequences of government actions. Some of these are unintended. As trusted advisers to your clients, the pandemic presents quite a challenge, akin to parsing ‘the weather’ from ‘climate change’. In the short window since the end of lockdown there has been a lot of change, not all predictable.
The tide is running in the direction of anything that supports home-centric working and living.
Working and shopping from home
The effects of this seismic shift are unfolding, not least in London where the Mayor, Sadiq Khan, is facing the insolvency of Transport for London (TFL), the Capital’s transport company that has already required a bailout of £1.6bn and urgently requires a further £4.5B to survive. Unsurprisingly, public transport traffic has dropped by 90% since the start of the pandemic and still hasn’t recovered meaningfully, with tourists and office workers staying away from London.
The City of London is a sea of solitude, causing the authorities to consider refusing the square mile as a live work hub for start-ups and smaller enterprises as the need for large corporate HQs looks to be severely diminished. An unintended consequence of the Covid message, stay safe and work from home where possible has not just landed with the general public, but appears to have caused a permanent behavioural shift.
Daytime catering to office workers has seen lasting change. Pret a Manger has laid off significant numbers of staff during the first wave, but in the absence of a mass return to the corporate hubs in the city, further rounds of cuts have followed. This must surely have longer term consequences for the value of equities linked to commercial properties as demand falls away and business whose models rely on the footfall of workers. TFL is merely the tip of the iceberg when it comes to long term systemic downward pressure in central London.
The upside has been seen in the growth of web-based retail, where the advantages of lack of business rates and questionable corporate tax management have been augmented by the convenience of home delivery, especially when you are at home to greet the couriers dropping everything to your door. Just like the bike messengers of much earlier times dropping your order around from the grocers and hardware stores.
Retail has become more commoditised with search and availability tending towards perfect competition, with the reduced margins that predicts. However the online market isn’t perfect, it has been monopolised by the data and search platforms, most prominently Google and Amazon. This duopoly controls the rankings of competing retailers and is incredibly adept at harvesting its share of the revenues generated by the user- base. It’s a user-base more easily defined now by who is left who doesn’t use them. The greatest commercial imbalance facing the UK and the wider world now is between the monopoly position of the internet gateways to commerce, and the cut throat, cost cutting demanded of their suppliers in order to maintain their market share.
High streets around the country have been under pressure for some time. Everything seems tilted against them; local councils are keen to discourage car use, rates are high, rent reviews are upwards only, minimum wage pressure has been strongly upwards and sales are falling as people trend towards the web. The pandemic has exacerbated this, taking out the retail and hospitality chains carrying high levels of debt first, with tenants declining to renew leases as they end. This is without the inevitable insolvencies that the collapse in trading has caused for smaller independent traders, forced to serve clients from their front doors as they can’t socially distance inside.
Estate Agents have had an unexpected fillip from the pent up demand held back during the spring, the decisions made to decamp from city apartments, and the stamp duty holiday. In what may prove to be an unfortunate accident of timing, many of the chains which have been put together by agents over the summer months and are reaching the point of exchange are starting to fall apart. Reports are appearing of widespread downwards valuations by surveyors, combined with lenders tightening criteria and redundancies invalidating mortgage offers. In normal times it would require a little patience from everyone in the chain whilst the sale was rebuilt, however the delays in processing means that the window for repairing a property chain and getting everything exchanged before the end of the stamp duty holiday is tight to say the least. And that ignores the second wave lockdowns in three of the four nations of the UK and the rolling tier three restrictions in England.
Falls in property prices that were predicted and utterly confounded in the euphoria of the re-opened property market have reappeared. Countrywide Estate Agents, who have had a difficult time in the past couple of years, have recently recapitalised their business again, but as a condition are planning significant cost and restructuring to meet what they are anticipating as new market conditions. Just before the pandemic struck, their share price had recovered to 393p per share but is currently trading below 160p. Meanwhile shares in Foxtons have dropped from a February peak of 95p down to 35p at the time of writing in mid-October.
Investors are clearly gloomy about property in the longer term.
