The week ahead 22 May 2023 - Capital values grew in April, just about
What to watch out for in the UK economy and property market this week.
The April MSCI figures confounded expectations of a contraction, albeit with just a marginal 0.1% month-on-month increase on the all property measure. As with the March data, industrial (up 0.6%) and retail warehouses (0.5%) saw enough growth to outweigh falls for offices (-0.8%) and standard retail (-0.7%), while shopping centres flatlined. All property yields were little changed at 6.6% on a monthly comparison, although retail warehouse yields have hardened from their peak of 6.9% in February to 6.7% in April. Overall, a mixed picture is emerging of a commercial property market where the worst of the price correction has now occurred, but with the data turning noisy as some sub-sectors edge up while others see further modest declines.
Retail warehouses are outperforming, perhaps as investors sense growing enthusiasm for the format among shoppers and retailers. Offices are lagging the field, as ongoing (and perhaps overdone) concerns persist on the impact of homeworking. Anecdotally, we have noticed that US-headquartered property investors tend to have a more negative outlook for the sector than Europeans, probably influenced by the more negative news seen for offices across the Atlantic. We suspect in the coming months the MSCI capital growth data will alternate between mild growth and contraction as prime asset values gradually rise again. However, there remains the possibility of a subsequent “double dip” as more secondary stock comes to the market and reveals a bigger impact on this tier of assets than is currently being priced in.
This week sees UK inflation figures released, which are likely to show a significant fall in the headline rate of inflation, but perhaps just a minor decline for core inflation (which excludes energy and food). This reflects more second round price pressures coming through for services inflation. Also, most of the major global economies will see ‘flash’ PMI data released for May, which we believe will show business activity holding up reasonably well, but with higher interest rates now starting to dampen growth.
Things to watch for this week
Tuesday 23rd May
UK inflation, April
Previous: 10.1%
Forecast: 8.3%
Headline inflation is expected to fall markedly as a lot of base effect comes out of the index. However, the Bank of England will be closely watching core inflation, which is proving sticky in most major economies.
UK PMI ‘flash’ Composite Index, May
Previous: 54.9
Forecast: 54.6
The convention of the index is a reading of over 50 suggests growth. We believe the May ‘flash’ figure should show a healthy level of growth, but perhaps slightly less than in April as the effect of higher interest rates filters through to firms.
Wednesday 24th May
Germany Ifo Business Climate Index, May
Previous: 93.6
Forecast: 93.1
This index, based on a survey of German businesses, has been steadily rising over the last six months. However, we believe the impact of rising interest rates will result in a small dip in the May figures.
