Market News

BY   Neil Callanan, Bloomberg News

, Source: Bank of England, Bloomberg Economics

(Bloomberg) -- On a site in a deprived part of east London, the cracks in the UK economy are meeting the crisis at distressed developer Country Garden Holdings Co.

The firm, which bought the land in 2018, has been planning to construct hundreds of apartments, but no buildings have gone up and now the developer faces a cash crunch. Meanwhile, new home sales in the UK capital have collapsed to an 11-year low as surging interest rates and a cost-of-living crisis damp demand. On a recent Wednesday, access to the site was closed with few signs of building work.

Developers have slowed housebuilding on concern about the economy and pressure from higher borrowing costs and inflation. That in turn is hurting construction firms, which are going insolvent at the fastest rate in a decade.

The problems in housing are just one sign that the UK economy is starting to wobble after a surprisingly strong first half of the year. Private-sector firms suffered their first contraction in seven months in August, and Bloomberg Economics expects higher borrowing costs to send the economy into a recession.

“The impact of higher interest rates is only beginning to permeate through the economy,” said Niraj Shah, an economist at Bloomberg Economics. “Elevated borrowing costs will lead more households and businesses to adjust their spending — denting overall demand in the economy.”

In its battle to tame inflation, the Bank of England has delivered 14 rate increases since late 2021 — the fastest monetary tightening since the late 1980s. 

The spike in borrowing costs has increased the risk of corporate defaults as some medium and large companies struggle with debts, the Bank of England warned this week. Some firms may “reduce investment and employment sharply” in response, it said.

Almost 440,000 firms were already in “significant distress” in the second quarter, an increase of 8.5% from a year ago, according to consultancy Begbies Traynor Group. 

Many of those are in construction, where output of private new housing fell more than 8% year-on-year in June.

The outlook has only worsened since then. Builder Crest Nicholson Holdings Plc said its sales rate has been “progressively deteriorating” in recent weeks and is half its expected level. Buckingham Group Contracting, which was working on the redevelopment of part of Liverpool Football Club’s stadium, blamed lost business when it announced it was no longer trading last week. Homebuilder stocks have fallen about 40% since the BOE rate tightening began in December 2021.

Back in east London, signs promising luxury homes “setting a new standard in riverside living” at the Country Garden site have been defaced with graffiti. 

The Chinese developer’s Risland unit has sought approval to increase the number of homes on the site, now called Calico Wharf, to about 950 from 800 when it bought the land. Previously, reports suggested it planned to begin construction in 2018 with a view to completing the homes in 2021.

Now, the plans for the land risk being affected by UK factors — rising costs and uncertain demand — as well as Country Garden’s own financial difficulties. The firm is on the verge of default and expects a multi-billion dollar first-half loss. On Friday, China proposed easing mortgage policies further as part of officials’ effort to halt a real estate slump.

Country Garden didn’t immediately provide a comment when reached.

In the UK, signs of weakness are also emerging in the services sector, the biggest part of the economy, as consumers cut back on spending on non-essentials. 

Retail sales posted their biggest year-on-year drop since March 2021 in August, according to a survey by the Confederation of British Industry. A separate report showed consumer confidence improved this month, though it remains below its average for the past five years.

That tough environment is taking a toll, with Wilko Ltd., the low-cost chain that sells everything from pencils to power tools, the latest firm seemingly headed toward insolvency. Paperchase, a stationery vendor, closed this year after no buyer was found. Marks & Spencer Group Plc said this month there’s a “risk that the consumer market will tighten as the year progresses.”

In the property market, sellers cut asking prices for homes by 1.9% in August, the most this year. The reductions in London were even larger. 

While UK unemployment remains low, it has started to creep up. If that were to continue, it would add to the problems for Prime Minister Rishi Sunak in the run up to an election due by early 2025. The Recruitment and Employment Confederation said that growth in demand for staff weakened at the start of this quarter. 

Jordan Rochester, a strategist at Nomura, expects more negative economic data surprises ahead “as we progress through the late-cycle slowdown phase.” 

Economists in a Bloomberg survey see the BOE lifting its key rate to 5.5%, while money markets favor 6% by early 2024. That would be the highest since 2001, marking another squeeze on consumer pockets.

“The full impact is yet to come through,” said Shah at BE. “Around four million more households see what’s expected to be a sharp increase in repayments by the end of 2026 as fixed-rate mortgage deals expire.”

--With assistance from Andrew Atkinson, Greg Ritchie and Emma Dong.

(Updates with homes prices in 17th paragraph)

Neil Callanan, Bloomberg News

, Source: Bank of England, Bloomberg Economics

(Bloomberg) -- On a site in a deprived part of east London, the cracks in the UK economy are meeting the crisis at distressed developer Country Garden Holdings Co.

The firm, which bought the land in 2018, has been planning to construct hundreds of apartments, but no buildings have gone up and now the developer faces a cash crunch. Meanwhile, new home sales in the UK capital have collapsed to an 11-year low as surging interest rates and a cost-of-living crisis damp demand. On a recent Wednesday, access to the site was closed with few signs of building work.

Developers have slowed housebuilding on concern about the economy and pressure from higher borrowing costs and inflation. That in turn is hurting construction firms, which are going insolvent at the fastest rate in a decade.

The problems in housing are just one sign that the UK economy is starting to wobble after a surprisingly strong first half of the year. Private-sector firms suffered their first contraction in seven months in August, and Bloomberg Economics expects higher borrowing costs to send the economy into a recession.

“The impact of higher interest rates is only beginning to permeate through the economy,” said Niraj Shah, an economist at Bloomberg Economics. “Elevated borrowing costs will lead more households and businesses to adjust their spending — denting overall demand in the economy.”

In its battle to tame inflation, the Bank of England has delivered 14 rate increases since late 2021 — the fastest monetary tightening since the late 1980s. 

The spike in borrowing costs has increased the risk of corporate defaults as some medium and large companies struggle with debts, the Bank of England warned this week. Some firms may “reduce investment and employment sharply” in response, it said.

Almost 440,000 firms were already in “significant distress” in the second quarter, an increase of 8.5% from a year ago, according to consultancy Begbies Traynor Group. 

Many of those are in construction, where output of private new housing fell more than 8% year-on-year in June.

The outlook has only worsened since then. Builder Crest Nicholson Holdings Plc said its sales rate has been “progressively deteriorating” in recent weeks and is half its expected level. Buckingham Group Contracting, which was working on the redevelopment of part of Liverpool Football Club’s stadium, blamed lost business when it announced it was no longer trading last week. Homebuilder stocks have fallen about 40% since the BOE rate tightening began in December 2021.

Back in east London, signs promising luxury homes “setting a new standard in riverside living” at the Country Garden site have been defaced with graffiti. 

The Chinese developer’s Risland unit has sought approval to increase the number of homes on the site, now called Calico Wharf, to about 950 from 800 when it bought the land. Previously, reports suggested it planned to begin construction in 2018 with a view to completing the homes in 2021.

Now, the plans for the land risk being affected by UK factors — rising costs and uncertain demand — as well as Country Garden’s own financial difficulties. The firm is on the verge of default and expects a multi-billion dollar first-half loss. On Friday, China proposed easing mortgage policies further as part of officials’ effort to halt a real estate slump.

Country Garden didn’t immediately provide a comment when reached.

In the UK, signs of weakness are also emerging in the services sector, the biggest part of the economy, as consumers cut back on spending on non-essentials. 

Retail sales posted their biggest year-on-year drop since March 2021 in August, according to a survey by the Confederation of British Industry. A separate report showed consumer confidence improved this month, though it remains below its average for the past five years.

That tough environment is taking a toll, with Wilko Ltd., the low-cost chain that sells everything from pencils to power tools, the latest firm seemingly headed toward insolvency. Paperchase, a stationery vendor, closed this year after no buyer was found. Marks & Spencer Group Plc said this month there’s a “risk that the consumer market will tighten as the year progresses.”

In the property market, sellers cut asking prices for homes by 1.9% in August, the most this year. The reductions in London were even larger. 

While UK unemployment remains low, it has started to creep up. If that were to continue, it would add to the problems for Prime Minister Rishi Sunak in the run up to an election due by early 2025. The Recruitment and Employment Confederation said that growth in demand for staff weakened at the start of this quarter. 

Jordan Rochester, a strategist at Nomura, expects more negative economic data surprises ahead “as we progress through the late-cycle slowdown phase.” 

Economists in a Bloomberg survey see the BOE lifting its key rate to 5.5%, while money markets favor 6% by early 2024. That would be the highest since 2001, marking another squeeze on consumer pockets.

“The full impact is yet to come through,” said Shah at BE. “Around four million more households see what’s expected to be a sharp increase in repayments by the end of 2026 as fixed-rate mortgage deals expire.”

--With assistance from Andrew Atkinson, Greg Ritchie and Emma Dong.

(Updates with homes prices in 17th paragraph)