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Autumn Statement Lays Bare the UK’s Dire Economic Outlook

Taylor Johnston

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There was no sugar coating the horrible economic forecasts in the Autumn Statement. With a historically large drop in UK household incomes, falling real wages and a sizeable recession — all compounded by a new squeeze on public services and higher taxes — Jeremy Hunt had little good news to highlight.

Although the chancellor skated over the worst predictions for Britain’s economy, he revealed just how much he was boxed in by the need to impose the biggest budgetary squeeze since 2010.

But Hunt was willing to accept horrible economic and public finance forecasts, in contrast with Kwasi Kwarteng, his predecessor, who ignored the Office for Budget Responsibility, the fiscal watchdog, and was crucified by financial markets.

The miserable outlook stems from Russia’s invasion of Ukraine pushing up wholesale energy prices to eight times above normal levels. This squeezes real incomes of households by 7.1 per cent by 2023-24 and also undermines the financial performance of companies and the government. There is little surprise that the economy has been pushed into a recession that will last through to the end of next year.

The subsequent recovery is forecast to be notably lacklustre, but here the global situation is less to blame than the UK’s domestic weakness.

In five years’ time the OBR expects the economy to be 3.7 per cent smaller than it thought likely as recently as March — a huge downgrade in economic performance. This means the economy will not have grown at all between the last election in 2019 and the next one, if is called at the end of 2024.

The persistently feeble economy coupled with much higher costs of government borrowing due to high inflation has blown apart the UK’s public finances. In the forecasts Hunt was presented with ahead of the Autumn Statement, the underlying government deficit was revised higher from £31.6bn to £106.4bn in 2026-27 on the back of higher predicted costs of servicing government debt, higher welfare spending due to persistent inflation and weaker tax receipts.

The OBR also told Hunt he was not on track to meet any of the government’s existing fiscal rules. Even when he loosened them — to make them easier to hit by measuring debt and deficits in 2027-28 rather than 2025-26 — the watchdog still reckoned the public finances were not sustainable. Public debt would still be rising as a share of gross domestic product in the forecasts, even by 2027-28, and public borrowing was more than 3 per cent of GDP.

Inevitably, that meant a budgetary consolidation was needed. Hunt bit the bullet and imposed £55bn of spending cuts and tax rises in his Autumn Statement, with cuts to day-to-day spending on public services and capital investment, and tax increases.

The timing of the measures differ. Spending cuts, which rise to £30bn a year, are delayed until the recession is forecast to be over. For the next year, the government is set to support the economy with its energy price guarantee and some funding for schools and hospitals.

Tax rises are coming earlier, however, with £7bn of revenue raising measures coming as soon as April, and then rising steadily to raise £25bn a year by 2027-28.

The tax increases are mostly being imposed through stealth measures that freeze tax allowances and thresholds, ensuring that as incomes, spending and profits rise, a greater slice of them will be taxed or subject to higher rates of tax.

Even as Hunt announced the largest budgetary squeeze since 2010, the OBR said he had not been as prudent as former chancellors in building resilience into the public finances.

“This chancellor has left himself comparatively little headroom against his proposed new fiscal targets relative to previous chancellors,” it said in its report.

The government is hoping that natural gas prices will fall and the Bank of England will not have to raise interest rates as much as the OBR has pencilled in to its forecasts. If that happens the outlook will be considerably brighter and some of the tax increases and public spending cuts might prove unnecessary.

But this may well prove to be wishful thinking. The Autumn Statement revealed that the UK’s economic performance is likely to be far — and persistently — worse than forecasts published in March.

Downgrades of this scale are very rare and, it turns out, extremely unpleasant for any chancellor — and for the nation.

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Original Post: ft.com

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Blackstone’s BREIT Defence

Taylor Johnston

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Amid all the crypto excitement we missed an update from another one of the more legitimately interesting stories out there: The Blackstone Real Estate Income Trust has published its third-quarter results.

Last month we published a big post exploring BREIT’s rampant growth, its growing importance to Blackstone, the increasingly wild divergence between its performance (up ca. 9.3 per cent this year) and publicly listed real estate trusts (down about 28 per cent in 2022) and the outlook at a time of rising rates and weakening property markets. It’s a subject that is getting more and more attention.

Unsurprisingly, Blackstone thinks all this chatter is overdone, so in addition to the 10-Q it also released a Q&A with Nadeem Meghji, the company’s head of Americas real estate, which attempts to address all these issues. The tl;dr is that Blackstone is great, they love BREIT, and so should you.

BREIT has delivered extraordinary returns to investors since inception nearly 6 years ago. We could not be more proud of the portfolio we have built. Demonstrating our conviction in BREIT, Blackstone employees have over $1 billion of their own money invested in the company, including more than $300 million invested by senior executives over the last four months.

The Q&A is worth reading to see how Blackstone’s rationale for why it is doing so much better than publicly traded real estate, its explanation for outflows (driven mostly by wealthy people in Asia, it seems) and how values its real estate.

Their emphasis below:

BREIT updates its valuations monthly to reflect what’s happening in the private real estate market and has those values reviewed by an independent third party.

Higher interest rates have led to materially higher cap rates (lower valuation multiples) which have negatively impacted valuations. BREIT’s valuations reflect this change, and we have increased our assumed rental housing and industrial exit cap rates and discount rates by 14% and 6% YTD, respectively.

At the same time, BREIT’s strong cash flow growth, stable income and value increases from our interest rate hedges have more than offset the negative valuation impact from materially higher cap rates.

Our 5.4% assumed rental housing and industrial exit cap rate is 160bps above the 10Y treasury yield of 3.8%.

So far this year, BREIT has sold $2B of real estate at an average 8% premium to the carrying value that BREIT ascribed to these assets.

Our assumed rental housing and industrial exit cap rate today is higher than many non-traded REIT peers, who have not moved their valuation assumptions as meaningfully.

For completists, in an accompanying video you can also watch Blackstone president Jonathan Gray talk up the prospects of BREIT despite a “challenging time” for markets. It’s almost as if the vehicle has become essential to Blackstone’s financial results…

The third-quarter report and a monthly portfolio update indicates that not everyone is convinced though. After a ferocious stretch of growth since being established, BREIT’s net asset value dipped to $69.5bn at the end of October, from $70.4bn at the end of September. (Its total assets were valued at $144.9bn at the time).

Outflows — in the form of repurchases of investor shares — have slowed since the summer, but will continue to be “closely watched as the fund matures in the face of a less constructive backdrop,” as Jefferies analysts noted in a report this morning.

The question is still just how sticky money in BREIT will prove if the US real estate market does crack and Blackstone is forced into marking down the value of its holdings. That could made its performance suddenly look a lot less fabulous. We suspect some people at 345 Park Avenue are praying for a Fed pivot.

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Original Post: ft.com

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Blackstone Limits Withdrawals at $125bn Property Fund As Investors Rush to Exit

Taylor Johnston

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Blackstone has limited investor withdrawals at its $125bn real estate investment fund after a surge in redemption requests from investors pulling cash from private assets.

The private equity group met only 43 per cent of redemption requests from investors in the Blackstone Real Estate Income Trust fund in the month of November, according to a notice it sent to investors on Thursday.

Shares in Blackstone fell as much as 8 per cent.

The withdrawal limit underscores the risks high net worth investors have taken in putting money into Blackstone’s mammoth private real estate fund, which — after accounting for debt — owns $69bn in net assets, spanning logistics facilities, apartment buildings, casinos and medical office parks.

Investors can redeem up to 5 per cent of their holdings in any given quarter, at which point Blackstone can limit withdrawal requests to prevent a fire sale of its illiquid real estate holdings.

On Thursday, Blackstone announced the sale of its 49.9 per cent interest in the MGM Grand Las Vegas and Mandalay Bay Resort casinos in Las Vegas for a $1.27bn cash consideration. Including debt, the deal valued the properties at more than $5bn.

Cash from the sales, which were agreed at a premium to the carrying values of the properties, can help with liquidity for BREIT as it meets redemption requests or be reinvested in faster-growing property assets, according to a person familiar with the matter.

In October, BREIT received $1.8bn in redemption requests, or about 2.7 per cent of its net asset value, and has already received redemption requests in November and December exceeding the quarterly limit.

It allowed investors to withdraw $1.3bn in November, or just 43 per cent of the redemption requests it received. Blackstone would allow investors to redeem just 0.3 per cent of the fund’s net assets this month, it added in the notice.

About 70 per cent of redemption requests have come from Asia, according to people familiar with the matter, an outsized share considering non-US investors account for only about 20 per cent of BREIT’s total assets.

Private capital managers have increasingly turned to retail investors, arguing high net worth investors should have the same ability as pension and sovereign wealth funds to diversify away from public markets. Part of the pitch that money managers make is that, by giving up some liquidity rights, higher returns can be achieved without assuming greater risk.

The BREIT fund allows for 2 per cent of assets to be redeemed by clients per month with a maximum of 5 per cent allowed in a calendar quarter. The fund’s net asset value has been marked up by more than 9 per cent in the 12 months to the end of September, a dramatic divergence from public markets where real estate investment trusts have declined sharply in value. Vanguard’s publicly listed real estate index fund has declined more than 22 per cent this year.

In recent years, the fund has been one of the big sources of Blackstone’s growth in assets under management, alongside a private credit fund called BCRED. In recent quarters, rising redemption requests from both funds have worried analysts as a signal of stalling asset growth.

“Our business is built on performance, not fund flows, and performance is rock solid,” said Blackstone in a statement sent to the Financial Times that emphasised the fund’s concentration in rental housing and logistics in fast-growing areas of the US and its predominantly fixed rate liabilities.

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Original Source: ft.com

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Tracking Russia’s Invasion of Ukraine in Maps

Taylor Johnston

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Since the start of the Russian invasion on February 24, Ukraine has liberated a total of 74,443 sq km of territory from Russian forces, according to data from the Institute for the Study of War think-tank.

Ukrainian forces advanced into Kherson on Friday after Russia said its forces had completed their withdrawal from the southern city, sealing one of the biggest setbacks to president Vladimir Putin’s invasion.

Kyiv’s progress and Moscow’s chaotic retreat across the Dnipro river, conducted under Ukrainian artillery fire, means Russia has now surrendered the only provincial capital it had captured in the war, as well as ceding key strategic positions.

At the end of August, Ukraine launched its first big counter-attack since Russia’s full assault on the country began in February, even as Kyiv complained that its forces lacked sufficient heavy western weaponry to make a decisive strike.

The advance liberated 3,000 sq km of territory in just six days — Ukraine’s biggest victory since it pushed Russian troops back from the capital in March.

Ukraine’s forces have continued to push east, capturing the crucial transport hub of Lyman, near the north-eastern edge of the Donetsk province, which it wrestled from Russian control on October 1. The hard-fought victory came after nearly three weeks of battle and set the stage for a Ukrainian advance towards Svatove, a logistics centre for Russia after its troops lost the Kharkiv region in the lightning Ukrainian counter-offensive.

Other key maps and charts from the war

The shift in the conflict’s focus towards the Donbas region follows Russia’s failure to capture Kyiv during the first phase of the war. Before Ukraine’s rapid counter-offensive, marginal Russian gains in the east suggested the war was entering a period of stalemate.

The Russians were thwarted in Kyiv by a combination of factors, including geography, the attackers’ blundering and modern arms — as well as Ukraine’s ingenuity with smartphones and pieces of foam mat.

The number of Ukrainians fleeing the conflict makes it one of the largest refugee crises in modern history.

In mid-March, an attack on a Ukrainian military base, which had been used by US troops to train Ukrainian soldiers, added to Russia’s increasingly direct threats that Nato’s continued support of Ukraine risked making it an enemy combatant in the war. On March 24, Nato agreed to establish four new multinational battle groups in Bulgaria, Hungary, Romania and Slovakia to add to troops in Estonia, Latvia, Lithuania and Poland.

Sources: Institute for the Study of War, Rochan Consulting, FT research

Cartography and development by Steve Bernard, Chris Campbell, Caitlin Gilbert, Emma Lewis, Joanna S Kao, Sam Learner, Ændra Rininsland, Niko Kommenda, Alan Smith, Martin Stabe, Neggeen Sadid and Liz Faunce. Based on reporting by Roman Olearchyk and John Reed in Kyiv, Guy Chazan in Lviv, Henry Foy in Brussels and Neggeen Sadid in London.

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Original Article: ft.com

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