Inflation

As a reader of this blog, by the point of publication, you will be aware of the Bank of England's decision on base rate, ergo somewhat better positioned than we were at the point of writing to make judgements on what comes next. Given this is more of an observational piece than a blow-by-blow news bulletin, we have chosen to discuss the latest round of published inflation figures at the all-important point of writing. We will look at this information not necessarily as a news item but in the context of what it may mean as a trend indicator, how this data will affect confidence in the market, and what positives are on offer for lenders and borrowers across our sector.

Firstly, looking at the ONS published data, the Consumer Prices Index, including owner-occupiers' housing costs (CPIH), rose by 3.8% in the 12 months to February 2024, down from 4.2% in January. On a monthly basis, CPIH rose by 0.6% in February 2024, compared with a rise of 1.0% in February 2023. The primary statistic that the media will focus on is that the Consumer Prices Index (CPI) rose by 3.4% in the 12 months to February 2024, down from 4.0% in January. One crucial aside in the figures is that Core CPIH rose by 4.8%, so excluding the most volatile elements, food and energy, the elements that are quickly repriced when the market is thrown into turmoil due to macro events in the way it has been, there is still an indication of some level of entrenched inflation. One of the most significant upward contributions to these broader figures came from housing, which is bittersweet when you weigh the increasing asset value with the heightened barrier to entry for consumers.

Looking at the housing figures, the annual rate was 2.9% in February 2024, up from 2.5% in January. The differential interestingly includes rents for housing and coincides with the ONS launching the Price Index of Private Rents (PIPR), which may become one of the most critical elements to monitor given the ballooning size of the UK rental sector. We have long propagated the thesis that the fixation on house prices going up to demonstrate strength in the property market isn't the whole picture when 20% of the entire market is rental stock, and that figure is going up exponentially. The strength of the market can be equally judged by measuring the disparity between earnings and private rents, so the inflation level of private rents does deserve its own index in the grand scheme of things.

At the point of writing, the 1-year Swap rate sits at 4.88%, without showing much of a deviation since the start of the year and using the Swap rates as a sort of pseudo-science economic barometer, it suggests that lenders have fully priced in their future margins based off the assumption of falling central rates at some point this year. From an investment perspective, this is interesting, especially if you are looking at the two and five-year Swap rates; it indicates that portfolio restructuring to once again seek higher yields may be on the cards; rates falling will inevitably mean bond yields will equally descend. The high-rate environment we have found ourselves in has led to a flourishing fixed-income market, and investors have become quickly accustomed to higher yields; whether this be retail investors utilising notice account products or sophisticated investors with larger accounts in the bond market, it's ultimately all the same pastime, and as yields diminish, there must be a home for this capital. Our asset class will be filling more of that demand as people become more au fait with the opportunity.

Positive sentiment for the borrowing markets doesn't take much unpacking or analysis beyond the obvious: the increasing affordability of term borrowing products available on the broader market, as rates fall, will stimulate the property development market, allowing clients to free up capital quicker, increase their margins, and successfully move onto their next project. One of the founding principles of this business is providing alternative, high-quality sources of finance. There is no escaping that a leaner rate environment will allow everyone in the sector a better opportunity to deliver that; it will also attract more prospective clients into the space, create more opportunities, lower costs, and finally spill over into solving the broader issues, such as housing and building communities.

Invest & Fund has returned over £200 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.

To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com or contact Shaheel at shaheel@investandfund.com.

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