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Interest Rates Are Returning to the Old Normal

Taylor Johnston



Is it only five months since I warned in these columns that interest rates would go up and up? 

The Bank of England had then just raised Bank rate to 1 per cent. Now it stands at 3 per cent, following Thursday’s 0.75 percentage point increase, the eighth increase in succession. 

Our third prime minister this year, and our fourth chancellor, are striving to put together a coherent fiscal plan that will help control inflation and reduce the pressure for yet more rate rises. But few experts think that the latest increase will be the last.

We are heading for the old normal far sooner than even I expected. And it will change our lives.

When Jeremy Hunt presents his Autumn Statement on 17 November he will announce what he has called “eye-wateringly difficult” decisions (don’t confuse that dampness around the eyes with tears). Tax rises and spending cuts designed to assure the markets that what some Conservative MPs have called the return of the adults will also mean a return to fiscal stability. But that will not mean a return to minuscule interest rates.

Mortgage rates are between 5 per cent and 6 per cent, government borrowing costs nearly 4 per cent, with little prospect of an early easing: the Bank of England now expects Bank Rate to peak at 5.25 per cent in the third quarter of 2023.

As for inflation, it looks set to be high for some time. The past may be no guide to the future but the last time the Retail Prices Index (the only measure we had then) rose through its present level of 12.6 per cent in July 1979 it stayed in double figures for more than two and a half years.

There was no Consumer Prices Index then — the headline figure used today, which is currently 10.1 per cent. But the boffins at the Office for National Statistics have back-calculated it and that too rose into double figures in July 1979 and stayed there until February 1982. 

One strange effect of the rapid rise in the cost of borrowing — gleefully passed on by the high street banks as their third quarter results have shown — has been that the return paid on cash exceeds that on shares. With their value plunging — the FTSE All Share index is down over 8 per cent since the start of the year — the yield from equities in the form of dividends has risen to 4 percent. 

But there is now a risk-free option to get a one-year return of 4.6 per cent with RCI Bank and a five-year annual return of 5.05 per cent with Close Brothers in their fixed-term savings accounts. The deposit is not at risk provided it is divided up into £85,000 parcels and so covered by official guarantees.

Even National Savings & Investments is paying 1.8 per cent on its Income Bond and 1.75 per cent tax-free in its individual savings account (Isa). Money with NS&I is safe to any amount up to the NS&I investment ceiling — for example, £2mn in its Income Bond. Short-term safety and certainty is now found in cash. At the latest count in April more than a million people had the maximum £50,000 in premium bonds which now pay prizes worth 2.2 per cent tax-free — though if you discount the big ones, which you will normally not win in a lifetime, the average return is 2 per cent. An extraordinary £100bn was held that month by those with more than £20,000 bonds out of a total of £117bn in bonds. The maximum is per person so couples can have £50,000 each and put up to £50,000 each into earmarked accounts for children or grandchildren. 

And what of mortgages? A colleague in his forties told me he was afraid of what his monthly payments might be when his fix runs out in 2025. “Higher,” I replied, perhaps £425 a month higher which the Resolution Foundation says is the average rise facing 5mn mortgaging households by the end of 2024. 

I felt his pain — and a close relative in his forties said much the same to me just this week. But I did respond by saying that although these rises are not what you are used to and can be frightening, in my view they are inevitable. Before 2009, only one major modern economy — Japan — functioned long term with interest rates as low as 1 per cent or even 2 per cent. Investors want to generate a minimum return greater than or equal to inflation, otherwise, their savings drop in value and preferably greater than inflation and output growth combined.

Until the global financial crash in 2008, the Bank rate had averaged 4.8 per cent since the Bank of England was founded in 1694, and even with the nano-rates of the past few years the figure is still above 4.6 per cent. 

So the Bank rate is heading back to where it should be and although mortgage rates are influenced by other factors it does not seem unreasonable for them to be at 5 per cent to 6 per cent. After all, banks have to make a profit on lending, including from the margin between the rates at which they raise funds and the rates they charge.

Rates like this are not the new normal — they are just the old normal. At the start of the century, average mortgage rates by building societies were 6.8 per cent falling to about 5.7 per cent just before the global financial crash. And the last time inflation was where it is today, mortgage rates were in double figures too.

Some good may come out of the old normal. It may give us the perfect opportunity to change the way mortgages are sold. What is the point of remortgaging every two or five years if there is no low rate to lock into?

At the moment there is a conflict of interest between mortgage brokers and their clients. If they sell a five-year or, better, a two-year deal they get regular commission from remortgaging. But if they sell a variable rate deal with no temporary discount the client may not be back, if at all, until they move — on average only once every 23 years, research by property website Zoopla found in 2017.

It is a conflict not found, for example, in the US where 30-year fixes are common or in Germany where the typical mortgage deal covers 25 or 30 years, often with rates fixed for 10 years and up to 30 for a small premium. 

Perhaps it is time for the UK to go back to our old normal and end these gambles on future interest rates by people who just want to buy a home. 

Not so much back to the future as forward to the past. 

Paul Lewis presents ‘Money Box’ on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney

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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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