A good time to buy pounds?

JaeVee Team

15 minutes

Financial, Political, Property Market

Coronaviruses update

With the Coronavirus now in full effect throughout the UK, the Government has taken unprecedented measures to ensure that the UK economy doesn't collapse.

On March 23rd, 2020 the Prime Minister, Boris Johnson, issued a nationwide lockdown telling citizens to remain in their homes, with strict guidelines issued on when they are allowed to go outside.

This has forced many businesses to rethink the way they work and with everyone isolating at home, all businesses are going to experience a significant drop in revenue.

In order to compensate for this, the UK Government has launched innovative policies helping both employees and employers.

The scheme introduced to help employees is the "Coronavirus Job Retention Scheme" and the scheme to help business is the "Coronavirus Business Interruption Loan Scheme."

 

Governmental Schemes

What is the Coronavirus Job Retention Scheme?

The Coronavirus Job Retention Scheme is a multi-billion pound scheme which will see all UK employers, regardless of size, be able to access central Government funds to allow them to continue paying salaries of staff without the need to lay workers off.

The scheme will reimburse employers for 80% of workers' wages up to a cap of £2,500 per staff member per month. To access the scheme, employers will need to designate affected employees as ‘furloughed workers', and notify employees of this change.

It effectively means putting staff on a leave of absence - so they will not be able to work during the time.1 The measures will last an initial three months with the view of extending this if necessary.

What is the Coronavirus Business Interruption Loan Scheme?

The Coronavirus Business Interruption Loan Scheme allows UK-based small and medium-sized businesses (SMEs) with an annual turnover of less than £45m to apply for an interest-free loan of up to £5m to help them through Covid-19 related difficulties.

The Government will provide a grant payment to cover the interest and initial fees for the first 12 months, and will guarantee 80% of the loan amount to give banks and financial companies the confidence to lend.

The money will be provided by more than 40 lenders who have signed up to the scheme, including High Street banks like Barclays, HSBC, Lloyds and NatWest, as well as more specialist finance companies.2

The scheme supports a wide range of business finance facilities, including term loans, overdrafts, asset finance and invoice finance.

What implications will these schemes have on the UK economy?

These schemes have been introduced with the aim of stimulating the UK economy.

By guaranteeing employees with 80% of their wages, employees have security that they will be able to pay for essential items they need in order to live such as rent, food and utilities.

The same principle applies in the form of the Coronavirus Business Interruption Loan Scheme. This scheme will allow small and medium sized businesses (SMEs) which account for three fifths of the employment and around half of turnover in the UK private sector3 to access quick cash that will allow their business to survive through this difficult time.

Following the UK Government implementing these schemes to support SMEs and their employees, it has helped to boost the financial markets.

Over the past month, the UK financial markets have declined significantly, on 26 February 2020 the FTSE 100 was at 7,042.47 and has dropped to as low as 4,993.89 on 23 March, 2020.

The reason for this sharp decline is due to there being no confidence in the market as a result of major uncertainty.

Therefore, the Government needed to introduce new policies that would restore confidence in the markets.

Although, it is not yet known how effective these schemes will be long term in restoring confidence in the markets, short term it appears these schemes are beginning to strengthen financial markets.

With these schemes implemented, Boris Johnson announced a nationwide lockdown on Monday 23 March, 2020.

In theory, a lockdown would only slow the economy further and should therefore cause financial markets to continue to fall, however the FTSE 100 has risen more than 9% in a day which is its best day since the 2008 financial crisis.4

 

Affected Markets

So why did the financial markets increase after a lockdown was announced?

The simple answer is because there is now certainty in the markets, this effectively increases confidence in the markets thus meaning prices increase.

Now there is certainty, companies are able to make accurate contingency plans on how they can deal with this pandemic and they can do so by making use of the schemes introduced by the Government such as the Coronavirus Business Interruption Loan Scheme and the Coronavirus Job Retention Scheme.

Although short term, markets are reacting positively to the introduction of these schemes and the same can be said for other countries around the world.

The U.S. has launched a similar package which totals $1.8tn in economic aid and the U.S markets have also reacted positively with the Dow Jones Industrial Average rising 11.4% - its biggest daily gain since 1933.

Asian markets are also seeing financial markets recover because of the introduction of rescue plans, South Korea's KOSPI exchange climbed 8.6% after the Government doubled a planned economic rescue package.5

In conclusion, it seems introducing the Coronavirus Business Interruption Loan Scheme and Coronavirus Job Retention Scheme is having positive effects on the UK economy and our financial markets.

This can be evidenced not only from the UK but also from foreign markets such as the U.S and South Korea where markets have risen in recent days due to the introduction of rescue plans.

Although short term markets seem to be recovering, the long term effects of these schemes being introduced remains to be seen.

The best case we have to look at how countries are reacting long term to rescue plans is China.

Where the UK is now entering a period of lockdown, China is now coming out of a lockdown.

The province of Wuhan where the virus originates from is now beginning to ease restrictions, as a result of this mainland shares have increased by almost 3%.6

Therefore we should expect to see markets continue to strengthen in the long run, particularly when the UK ends its lockdown period.

The fundamentals of the UK property market

Although the Coronavirus has investors asking how the UK property market will react, it is worth noting that the fundamentals of the UK property market still exist.

The biggest contributing factor towards what drives the UK housing market is the undersupply of houses.

Historically, the UK has not met its housing needs with supply being constrained by things like planning rules, lack of public investment, skills shortages, and even the availability of raw materials.

Meanwhile demand is further boosted by domestic population growth and the low cost of borrowing.7 With these factors in mind, supply and demand has driven prices up and will continue to do so until the UK's housing needs are met.

Due to the UK not meeting its housing demand, there is currently a backlog of housing of 4.75 million households across Great Britain (4 million in England).8

With this in mind, the Autumn Budget in 2017 set out an ambition "to put England on track to deliver 300,000 new homes a year.9 Despite the Government's aim to build 300,000 homes a year, the UK is still failing to meet this target.

From the below chart, you can see that the UK has continued to increase its supply of homes year on year since 2012-2013.

However the net additional dwellings being delivered are still well below the Government's goal of 300,000 homes a year.

Net Additional Dwellings Per Year

Not only does this mean that the UK isn't improving the backlog of homes needed, it also means that the backlog of homes is actually increasing.

With demand continuing to be boosted by domestic population growth and the low cost of borrowing, the UK property market is predicted to remain strong during the current pandemic crisis.

Therefore, from an investor perspective, the UK property market represents a sound investment opportunity.

Furthermore, over the last month, the UK Government has lowered the cost of borrowing even further, slashing the interest rate from 0.75% to 0.25% before cutting it again days later to an all time low of 0.1%.

By lowering the cost of borrowing further, we would therefore expect to see a further boost in demand for homes as it makes mortgage rates cheaper and therefore houses become more attainable.

When interest is cheaper to borrow, more people borrow it hence a continued demand to get on the property ladder in the UK.

In terms of the supply of houses within the UK, supply has always been limited by planning rules, lack of public investment, skills shortages, and the availability of raw materials making it more difficult for house builders to meet the 300,000 homes a year target.

Now the Coronavirus has hit the UK, it will be even more difficult for house builders to meet their target with many banks halting drawdowns and building merchants closing their doors making it difficult for builders to get materials.

There is also controversy in the media regarding whether building sites should remain open, although it's currently unclear what will happen. What is clear is that any delay in construction, even as little as 6 weeks, will result in the housing delivery targets of 300,000 not being met for the 8th year in a row.

In terms of what this means for the UK property market, despite the Coronavirus outbreak, the fundamentals have not changed.

We have a housing shortage to tackle increased demand from an ever growing population looking to borrow cheaper mortgages.

Therefore making the UK property ripe for investors looking to take mid to long term positions.

How has the money markets reacted to the Coronavirus?

The Coronavirus has had a massive impact on money markets over the past months. This has been due to the markets correcting themselves from the volatile financial markets from around the world.

As you can see from the charts below, the aftermath from the Coronavirus means that currencies from around the world now get more pounds per currency.

This is a major plus for the UK as it means that it is now cheaper for foreign investors to invest in the UK. As you can see from below, foreign investors from China, UAE, United States and Europe now have an incentive to invest in the UK because they get more pounds for their home currency.

Please note this report is not to be considered as investment advice. We recommend you seek independent financial advice and conduct your own due diligence before making any investment.

About JaeVee

JaeVee joint ventures with experienced property developers to bring residential schemes to life in the UK whilst helping to tackle the housing shortage problem. The structure of our model creates equity investment opportunities for investors into these projects, where investors enjoy the profits of a successful development without sacrificing their demands on control, protection and accessibility.

Sources

[1] https://www.kentonline.co.uk/kent-business/county-news/firms-guide-to-Coronavirus-business-relief-on-offer-224355/
[2] https://www.bbc.co.uk/news/explainers-52005137
[3] https://www.fsb.org.uk/uk-small-business-statistics.html
[4] https://www.bbc.co.uk/news/business-52028673
[5] https://www.bbc.co.uk/news/business-52028673
[6] https://www.bbc.co.uk/news/business-52028673
[7] https://avamorecapital.com/uk-economic-fundamentals-are-still-strong-and-the-property-market-is-already-moving-on
[8] https://www.crisis.org.uk/ending-homelessness/homelessness-knowledge-hub/housing-models-and-access/housing-supply-requirements-across-great-britain-2018
[9] https://commonslibrary.parliament.uk/research-briefings/cbp-7671

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