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Hunt Unveils £55bn Fiscal Squeeze As UK Economic Outlook Darkens

Taylor Johnston



Jeremy Hunt, chancellor, confronted the fiscal “storm” battering Britain on Thursday, announcing £55bn of tax rises and spending cuts intended to restore the country’s reputation and shore up its frail balance sheet.

Two months after Kwasi Kwarteng, Hunt’s predecessor, sparked market panic with a “mini” Budget that included £45bn of unfunded tax cuts, the chancellor’s Autumn Statement turned Tory economic policy on its head.

While Kwarteng announced the largest tax-cutting plan for 50 years, Hunt presided over the biggest tax-raising effort for 30 years outside the period of the pandemic, leaving the country with the highest tax burden since the second world war.

The chancellor told a sombre House of Commons that a massive fiscal consolidation, including £30bn of spending cuts and £25bn of tax rises, was needed to restore Britain’s credibility and tame inflation.

The Office for Budget Responsibility said that by 2027-2028 Britain would have a tax burden of 37.1 per cent of gross domestic product — one percentage point higher than forecast in March and a postwar record.

With Britain’s economy sliding into recession, the OBR forecasts highlighted the challenge for household and public finances, both of which will be strained by predicted 2023 inflation of 7.4 per cent. The economy is projected to contract by 1.4 per cent and is not forecast to recover to pre-pandemic levels until the end of 2024.

The OBR said that rising prices would erode real wages and reduce living standards in the biggest fall in six decades, down 7 per cent over the two financial years to 2023-24. This would wipe out the previous eight years’ growth, despite over £100bn of additional government support.

The pound was 1 per cent lower on the day at $1.1788 against the dollar after Hunt set out the package, slightly below the level before the chancellor began his statement. UK government bonds remained under moderate pressure, trading slightly below on the day.

Much of the fiscal consolidation, including “stealth” rises in taxes and a big squeeze on public spending, is scheduled for the years after an expected 2024 general election. Rachel Reeves, Labour Treasury spokesperson, said it was intended as an election “trap” for her party.

But one of the biggest increases in taxation — freezing national insurance thresholds for businesses — will take effect from April 2023.

Hunt delighted Tory MPs by finding money to soften the blow of rising inflation for the health and social care system, providing an extra £5bn a year, and a further £3bn for schools for the next two financial years.

He also announced inflation-linked increases to pensioners and those on benefits, confirming he was keeping the “pensions triple lock”. He said: “To be British is to be compassionate.”

Hunt said public spending would rise by only 1 per cent in real terms in the next parliament and capital spending would be frozen in cash terms, raising £21bn and £14bn respectively — the majority of the fiscal squeeze. This would represent a significant cut to capital spending plans.

The chancellor insisted that the tax rises and spending cuts were required by an “international crisis” and played down the idea that any of the problems were homegrown. “It is a recession made in Russia, a recovery made in Britain,” he said.

But his statement was a recognition that Britain’s dismal recent economic performance — hobbled by the 2008 crash, the Covid-19 pandemic, the Ukraine war and Brexit — meant the country was living beyond its means.

Hunt told MPs that his Autumn Statement would ensure that Britain’s debt was falling as a share of GDP by the end of the five-year forecast provided by the OBR, which was sidelined by Kwarteng.

Britain’s economic recovery from the depths of the pandemic has fallen short of its rivals. Figures collated by the OECD found that the UK economy was still 0.4 per cent smaller in the third quarter of this year than in the final quarter of 2019; the eurozone was 2.1 per cent larger and the US 4.2 per cent bigger.

Andrew Bailey, Bank of England governor, said on Wednesday that Brexit had contributed to the UK’s economic weakness, although Hunt and Rishi Sunak, prime minister, have played down its significance.

Hunt told MPs the global outlook was difficult. “We aren’t immune to these global headwinds,” he said. “But with this plan for stability, growth and public services, we will face into the storm.”

The chancellor said his principal objective was to help the BoE defeat inflation, which hit a 41-year high of 11.1 per cent in October. “We need fiscal and monetary policy to work together,” he said.

The chancellor insisted that his tax-raising measures were fair: they included a cut in the threshold for the 45 per cent top rate of tax from £150,000 to £125,000; the burden of dividend taxes and capital gains tax will also rise. “We are asking more from those who have more,” he said.

Businesses will also face a big tax increase, notably through the freezing of the national insurance threshold for employer contributions, which will raise £5.8bn by 2028. A windfall tax on energy companies will raise £14bn next year.

Hunt confirmed that average energy bills would be capped at £3,000 a year from next April for everyone, while the most vulnerable would receive special help to hold down their bills.

Among the measures announced by Hunt was a confirmation that EU rules governing the insurance sector, Solvency II, would be rewritten to release “tens of billions of pounds” of capital to be spent on infrastructure. The Sizewell C nuclear power station would be built.


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Blackstone’s BREIT Defence

Taylor Johnston




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

Taylor Johnston




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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Tracking Russia’s Invasion of Ukraine in Maps

Taylor Johnston




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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