Deloitte's latest CFO Survey highlights growing caution amongst UK firms, so what does this mean for real estate?
Every quarter, my colleagues in the Deloitte economics team ask the Chief Financial Officers of many of the UK's largest listed companies about their attitudes to valuations, risk and financing, as well as a number of other economic factors. The results offer a very timely snapshot of corporate sentiment in the UK, which, as the latest survey shows, has continued to wane. CFOs now rank cost reduction as their number one balance sheet priority, and they are placing greater weight on other defensive strategies including increasing cash flow, disposing of assets and cutting leverage. They also foresee slower growth in hiring and capex over coming months.
A glance at the year-end statistics shows these more cautious findings have been reflected in the real estate industry. Take-up of office space in London was steady but not outstanding in 2015. Investment in UK real estate narrowly missed 2014's recent high. And rents, while growing rapidly in certain subsectors and specific markets, are rising at a leisurely pace across most of the country.
Yet the growth in uncertainty amongst CFOs has been heavily influenced by concerns over Europe and emerging markets. Crucially, they remain upbeat about prospects for the UK economy, and some of their reasoning has particular relevance to real estate:
- Firstly, CFOs still rank the introduction of new products or services, or expansion into new markets, as their second most important priority, demonstrating a continued willingness to grow, and the potential for increased property requirements.
- Secondly, CFOs are relaxed about inflation and interest rates: inflation expectations have fallen, with most now predicting it to be less than 1.5% in two years' time, while almost two thirds say that any corresponding interest rate rise would have to be greater than 100bps before it impacted their employment or investment plans.
- Thirdly, while our own research demonstrates that gradual interest rate rises have historically correlated quite well with real estate capital value growth, financial market expectations for rate rises have fallen since the summer – pushing back the date at which this relationship will next be put to the test.
The latest CFO Survey results show that the corporate sector is now at the tail-end of a two year surge in sentiment, but while readings are falling across a number of the survey's key questions, in many cases the levels themselves remain elevated. Clearly, both the level and direction of travel of these indicators are important, and the fact that CFO sentiment is cooling does not rule out another year of solid performance – either for the economy or real estate.
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