Here Charu Lahiri, Investment Manager at Heartwood Investment Management, discusses the current challenges at the heart of online retailing and the overall effect click to click has had on commercial property markets.
Online retailing is an evolving landscape that is leading to structural shifts in the commercial property market across the globe. Here in the UK, internet sales now make up 16% of total retail sales compared to less than 4% a decade ago, according to the Office of National Statistics. This trend is expected to grow further; indeed, the average weekly value of internet sales totalled more than £1 billion in September, a 14% increase year-on-year. In fact, the UK leads the rest of Europe in total online sales volume.
Inevitably as retail purchasing trends are changing, demand for traditional bricks-and-mortar retail is falling. Mid-market UK based retailers in the fashion industry are reported to be reducing the number of stores that they plan to open, as well as considering closures at lease expiry. Furniture retailers’ expansion plans have also been curtailed in the last couple of years, with High Street names such as John Lewis and Next having ceased their activity in acquiring stores in the pure homewares market.
Instead, retailers are adapting by restructuring supply chains and, in turn, requiring warehouse and logistics facilities for multi-level purposes. These include e-fulfilment warehouses to prepare and ship orders; picking and sorting; returns; and last mile delivery centres. According to Prologis, every €1 billion spent online requires an additional 775,000 square feet of warehouse space.
Supply constraints and pent-up demand
Supply constraints mean that the warehouse/logistics sector is struggling to keep up with demand, which reached a new peak at the start of 2017 [Source: JLL]. For example, between 2012 and 2016, when e-commerce was expanding, just 13.65m square feet of warehouses was delivered to the market, compared to 40.47m square feet between 2005 and 2009 [Source: Kevin Mofid, Savills].
Constrained supply has been attributed to the lack of developable land, given that the UK market is noted for having high barriers to entry. This has resulted in a shortage of ‘grade A’ prime property: in the fourth quarter of 2016, grade A available supply fell 23% and a further 3.3% during the first quarter of 2017. In addition, speculative completions during 2017 are expected to be lower than historical levels. In part, this decline is due to limited development finance post the Brexit vote, but importantly some occupiers are shifting to purpose-built facilities as much of the existing stock is considered insufficient for e-commerce needs.
Pressure on prime rents
These trends are resulting in high occupancy rates, low vacancy rates and rising pressure on prime rents. According to researchers Cushman & Wakefield, annual prime rental growth ranged from 3.1% in the West Midlands to 13% in Yorkshire in the first quarter of 2017. The South East, East and Yorkshire are seeing the strongest increase in e-commerce demand and rental growth in those areas is above 10% per annum. These supportive conditions offer stable and long-term income opportunities for investors, notwithstanding that the risk premium versus UK gilt yields is compressing.
Overall, the outlook remains constructive for rental growth prospects in the logistics and warehouse sector, due to the underpinnings of strong supply and demand dynamics. Total returns in the industrial and logistics sector should outperform those for office and retail over the next few years. That being said, the UK property cycle is maturing and investors may have to expect lower returns compared with recent history, despite strong fundamentals.
We have for some time advocated an investment approach that is targeted to sectoral trends, but also one that can seek income and return from specific regions. Over recent months we have chosen to invest in UK regions and cities outside of the South East and London, where capital values and yields potentially offer more attractive value. We believe that there are opportunities to be exploited in UK commercial property, but they are now appearing in more specific areas of the market which are undergoing structural change.
19th October marks the 30th anniversary of Black Monday, when in October 1987 stock markets around the world experienced a flash crash. The FTSE 100 fell 11% on the day, and then fell a further 12% the next day, wiping out more than a fifth of the value of the UK stock market in just two trading sessions.
As terrifying as these sharp falls were, hindsight tells us that for investors who didn’t panic, even a badly timed investment made money in the long run.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown: “Stock market crashes are a bit like the Spanish Inquisition- no-one expects them. The 1987 crash is renowned for the speed and severity of the market decline, and undoubtedly when markets are plunging so sharply, it’s hard to keep a cool head.
“Hindsight clearly shows that the best strategy in these scenarios is to sit tight and not engage in panic selling. Time has a tremendous healing power when it comes to the stock market, and price falls are typically a buying opportunity. The stock market is an unusual trading venue, in that buyers tend to stay away when there’s a sale on.
“The Footsie has recently reached a new record high, which prompts the question of whether it’s heading for a fall. There are always reasons to worry about the stock market and now is no exception. The Chinese credit bubble is front and centre of concern, along with increasing global protectionism, and the disturbing prospect of World War Three being started on Twitter.
“However there are also reasons to be positive, with the global economy moving up a gear, borrowing costs remaining low, and stocks facing little competition from bonds and cash when it comes to offering a decent return.
“The market will of course take a tumble at some point, and it’s impossible to predict when. This makes being bearish an easy game, because you only have to wait so long before you are eventually proved right. The big question though, is how much you have lost out on in the meantime by sitting on your hands.
“It’s important to bear in mind that investing isn’t a one-time deal, savers typically invest at different times throughout their lives, and at different market levels, and sometimes they will be luckier with their timing than at others. To this end, a monthly savings plan takes the sting out of any market falls by buying shares at lower prices when the inevitable happens.
“The golden rule, of course, is to make sure you are investing money for the long term. In the short term the stock market is a capricious beast and can move sharply in either direction, but in the long run, it’s surprisingly consistent.”
After the crash
The table below shows stock market returns following the three big stock market falls of the last thirty years: 1987, 1999-2003 and 2007-2009.
The first column shows what you would have got by investing £10,000 on the eve of the crash, and pulling your money out at the bottom of the market. The remaining columns show what would have happened to your investment if you had held on to it. These numbers should be viewed as examples of what stock market returns have been if your timing is really pretty stinky, and you only happen to invest £10k once in your entire life, on the eve of a dramatic downdraft in the market.
In 1987 investors would have seen £10,000 reduced to £6,610 in a matter of weeks. However, if they had waited 5 years, their investment would have fully recovered, and 10 years later would be worth £32,690, with dividends reinvested. Today that investment would be worth £104,340.
Stock prices recovered pretty promptly after the 1987 crash, in contrast to the bursting of the tech bubble in 1999, which was compounded by the Enron scandal and the World Trade Centre attack, leading to a deep and prolonged bear market lasting until 2003. £10k invested in the stock market in 1999 would be worth £23,210 today, an annualised return of just over 5%.
Looking at these figures, it’s hard to dodge the conclusion that this was the worst of all three periods for stock market investors. It also contributed to the already declining fortunes of defined benefit schemes in the UK, and did huge reputational damage to insurance companies as the dreaded MVR (Market Value Reduction) became common parlance amongst hitherto happy With Profits policyholders.
The value of rolling up dividends shines through in the numbers below. Since the peak of the market in June 2007, £10,000 would only have grown to £11,890 based on stock price movements alone. But once dividends are counted and reinvested, that rises to £17,230, not a bad result given this money was invested at the peak of the market just before the global financial crisis took hold.
Is the Footsie about to crash?
The FTSE 100 reaching a new record high recently has of course prompted questions about whether it’s heading for a fall. However the level of the Footsie is not a measure of the value in UK stocks, seeing as it doesn’t take account of the level of earnings of companies in the index.
Below are two related measures of value of the UK stock market which take company earnings into account, but each give a slightly different picture of valuations in the UK stock market right now.
The headline historic P/E is elevated compared to its historic average, though still well short of the level seen in 1999.
The Cyclically Adjusted P/E Ratio, a valuation method championed by Nobel prize-winning economist Robert Shiller, takes a longer term view of earnings by looking over the last 10 year, which smooths out volatility in the one year P/E number.
On the cyclically adjusted measure, the UK stock market is trading below its historical average, and well below levels seen in both 1987 and 1999.
So which of these two measures should we believe? Well, we assign more weight to the Cyclically Adjusted P/E because it takes a longer term, more rounded view of stock market valuation. But if we simply take both measures into account in combination, together they suggest the market is somewhere in the middle of its historic range.
When thinking about the valuation of the stock market, it’s also worthwhile considering the valuation of alternative assets. The 10-year gilt is currently yielding 1.3%, and cash is yielding next to nothing with base rate at 0.25%. This contrasts sharply with 1987 when base rate was 9.9% and the 10-year gilt was yielding around 10%. So if you think the UK stock market’s expensive right now, then you have to take a really dim view of the value provided by bonds and cash.
(Source: Hargreaves Lansdown)
There are mixed thoughts across the UK on the current state of the property market and the prospects to come. In some regions economists believe it’s the best it’s been in the last ten years, while others are confident in the current slump, particularly in London. Here Paresh Raja, CEO of Market Financial Solutions (MFS), talks Finance Monthly through his thoughts on the future of the UK property market.
The UK has developed something of an obsession with homeownership. While our European neighbours are content with long-term leasing contracts, homeownership in the UK is as much of a personal milestone as it is a popular financial investment – a report by YouGov found that 80% of British adults are aspiring to buy a property within the next 10 years. As an investment, property is a resilient asset able to withstand periods of market volatility. At the same time, price appreciation as a consequence of demand positively contributes to home equity, increasing its resale value and potential to deliver long-term returns.
The allure of residential real estate has remained consistently high in the UK, and the Brexit announcement has done little to dampen investor appetite for property. The average house price has risen by an average of 0.37% per month since the referendum vote in June 2016. Should this trend continue, house prices could rise by as much as 50% over the next decade. While an impressive feat, the same YouGov report stated that 85% of respondents believes that owning a home is very difficult in today’s economic climate.
To ensure homeownership remains an attainable goal, the Government has pledged to increase the housing stock by promoting the construction of new homes across the UK. A housing white paper released earlier in the year has also set out the Government’s plan to reform the housing market and contribute to housing supply, though little has been done since then to demonstrate the Government’s commitment to supporting property investment. While this is a welcome measure, such a pledge needs to be informed by a long-term strategy that lays down the foundations for the ongoing support of the property market against any future economic and political shifts.
Of course, there are variety of different avenues for aspiring homeowners to jump on the property ladder should they struggle to acquire finance from traditional lenders. The Bank of Mum and Dad (BOMAD) has fast become a leading source of finance for millennials struggling to acquire a mortgage or buy a house in a desirable location. Parents are predicted to lend over £6.5 billion in 2017 to support the property aspirations of their children – a 30% increase on the amount loaned in 2016.
Considering the amount of property wealth that has been amassed by UK retirees and the Baby Boomer generation, the transfer of such wealth through inheritance constitutes a significant proportion of property transactions – a study by Royal London anticipated that over the coming decade, £400 billion worth of real estate would be passed on from older generations to those aged between 25 and 44. This transition will have profound impact on the wider property market.
Recent research commissioned by MFS found that that 36% of people across the country will be inheriting a property – equivalent to 18.64 million people. Interestingly, the research found that over half of people due to inherit a property will be looking to sell it as soon as possible so they can re-invest the money in a different asset or property of their choosing. A third would also look to take advantage of the long-term returns on offer by undertaking some form of refurbishment so that the house is in a better condition to sell or place on the rental market.
The challenge remains for the property sector to provide clear guidance around the options that exist for those seeking to maximise the potential gains of their real estate inheritance, while at the same time bringing new properties onto the market in improved conditions. Taking into account the full range of trends underpinning the property market, homeownership does not have to be an attainable goal for the few. The market is at a critical juncture, and with demand for property consistently high, there are likely to be significant opportunities arising over the coming year.
The German stock market crash is a timely reminder of the need to broadly invest, affirms one of the world’s largest independent financial services organisations.
The comment from Tom Elliott, deVere Group’s International Investment Strategist, comes as the DAX, Germany’s top stock index, was nearing the red after shares in the country’s largest car makers dropped over a fresh probe into the diesel emission scandal.
Mr Elliott observes: “Eurozone stock markets have felt the pain of a strong currency in recent weeks, as investors think that improving economic data will force the ECB to curtail its bond-buying program prematurely and - if inflation picks up - lead to interest rate hikes.
“But the DAX 30, the key German stock market index, now has an additional problem that has contributed to recent falls. Its motor sector – led by BMW, Daimler and Volkswagen- is under a cloud as more jurisdictions line up to fine the companies over diesel emissions. Last week, the Mayor of London announced plans to seek compensation from Volkswagen after the true scale of the company’s diesel-fuelled cars’ contribution to the city’s air pollution became known. The sector is at risk of punitive fines across the world.”
He continues: “A further risk is that the ‘Made in Germany’ brand suffers more generally.
“However, while this is embarrassing for the German auto sector, and for German exporters more generally, it is likely to be a passing phase. The fines will be absorbed by shareholders, and meanwhile the German auto sector will return to the real long-term battle: is there a durable market for high quality, driver-driven, private cars?
Mr Elliott goes on to say: “German - and European autos’ biggest threat comes from technology from the US – in the form of driverless cars and battery cells, amongst other factors – as well as changing social habits, which include car pooling and young adults driving less in developed economies.
“The German stock market crash is a timely reminder of the need to broadly invest so that portfolios will have exposure to the young companies likely to benefit from driverless cars for example.”
He concludes: “Diversification of portfolios across sectors, asset classes and regions will ensure investors are best-placed to take full advantage of the present and future opportunities and to mitigate the risks.”
(Source: deVere Group)
Craig James, CEO of Neopay, believes the financial sector must remain priority for Brexit negotiations. Below he explains to Finance Monthly why.
It is now 13 months since the UK voted to leave the EU.
With Brexit negotiations underway and Britain’s political position now more uncertain following June’s general election result, the impact for European business and finance remains similarly uncertain.
Much has been made of the fear that a United Kingdom outside of the EU’s single market would suffer economically, and that may be true – at least in the short term.
But it is also the case that losing the world’s fifth largest economy would be detrimental to the EU, particularly as political uncertainty and the instability of the Euro continues to cause disruption to Europe’s collective economy.
Recently, it was reported that a delegation from the City of London, led by former City minister Mark Hoban, had visited Brussels – independent of the government – to lay out a plan for a future trade deal between the UK and the 27-nation bloc.
The group, it was claimed, was particularly concerned about preserving the financial sector’s relationship with the single market, especially when it comes to “passporting”, the current system which enables businesses to export and import financial services under one licence.
Costly restructure
It is in the UK’s and EU’s best interests that a mutual arrangement continues after Brexit, and is something the government needs to focus on as it is something that is very achievable – and a likely outcome of negotiations.
If the UK is outside of the single market, that automatically puts an end to current passport rules, and while this could be detrimental to Britain, it also presents a problem for the EU’s financial market.
Mark Hoban is right to say that it would cost the EU if the UK leaves without a deal as it would mean the EU’s financial institutions would have no access to services in London, which will likely remain a key business and finance hub even outside the European Union.
A report by the Association of Financial Markets in Europe (AFME) which represents the financial services sector in the EU, recently published a report suggesting the UK’s exit could create €15bn worth of restructuring costs for the industry, and potentially €40bn to meet the concerns of regulators.
The impact on EEA and UK consumers would also be prohibitive. In a no deal scenario, millions of consumers could find themselves, at least temporarily, without access to some of their financial services if passporting arrangements cease without any mutual agreement or transitional arrangements.
And then there’s ancillary effects, for instance the impact on Financial Intelligence Units and their work, if the current regime were to end without any deal in place.
While minority areas in the EU may see Brexit as an opportunity, it is widely understood that the City of London carries substantial benefits due to its established reputation, size and strength in the global market, as well as offering cheaper and more efficient access to financial institutions.
No deal Brexit is not likely
While this recent City delegation has reportedly visited Brussels in concern over the potential of a poor deal – or no deal – after Brexit, this outcome is highly unlikely as the EU is aware of the damage it will do to itself by punishing Britain for the sake of it.
Even if the UK makes a clean break from the single market and the current passporting regime ends, it is likely that some form of mutual access agreement – like that reportedly being pushed by the City delegation – will be reached, enabling financial groups from the UK and the EU to operate in each other’s markets.
At the very least, a transitional period will need to be agreed to allow enough time for adaptation and prevent UK and European financial services falling into confusion with the resulting impact on consumers, businesses and our economies.
Financial services businesses looking to set up within this region will always look to London first as a base of operation. It remains to be seen what will come of Brexit negotiations for this sector, but a suitable trade deal and appropriate transitional period remains the most likely outcome for both sides.
Results from the second quarter of a year-long research study reveal how investors view the performance of a range of different players in the autonomous vehicle (AV) market, providing for each firm, the percentage of investors who judge that company as ranking in the top five for having the most investible Autonomous Vehicle technology.
Manufacturers
In the survey, conducted by international law firm Gowling WLG and economic research agency Explain the Market, Tesla (26%) topped the charts when it comes to investor confidence in AV manufacturers - closely followed by BMW (22%).
IT giants
For the world's biggest IT companies, investors ranked Google (35%) as the business with the highest potential for success in the AVmarket. This is markedly higher than other giant brands which investors feel are yet to make an impact - notably Baidu (2%), Uber (8%) and Apple (11%).
Tech brands
The survey also reveals Bosch (54%), Tata Elixsi (36%) and ParkWhiz (29%) as the most investible tech brands in the AV tech sector, according to UK investors.
Guy Shone, CEO Explain the Market said "When it comes to driverless tech UK investors are showing a deeper level of interest and a stronger commitment than ever before"
Stuart Young, partner and head of Automotive at Gowling WLG said: "When it comes to the AV sector - research shows UK investors are backing innovation from a wide range of sources. UK Investors clearly have confidence in both the old and the new, the big and the small. They are tracking the best ideas and conditions whether they come from start-ups or corporate giants."
Since the survey's Q1 results, there have been some subtle shifts in investor mood regarding the barriers towards widespread AV introduction. Whilst concerns about unclear rules and regulations have slightly diminished, doubts about a lack of collaboration between industry and government appear to be increasing.
The progress of smart cities projects is also an increasingly important factor to investors when it comes to making a decision to invest in the AV market.
As our economy enters a new period of instability, the importance of monitoring investor attitudes increases. This is the second wave of a year-long study of over 1,000 investors. The ongoing tracker study will track the confidence, attitudes and opinions of UK investors to the AV sector and reveal what investors really want as the sector develops. The study will also probe the real barriers and factors that impact confidence.
(Source: Gowling WLG)
Mortgage debt increased by 11%1 to $201,000 last year and more than half (52%) of Canadian mortgage holders lack the financial flexibility to quickly adjust to unexpected costs, per a new Manulife Bank of Canada survey. This despite 78% of Canadians having made debt freedom a top priority.
The problem is most acute among Millennials, who saw their mortgage debt rise more than any other generation. Millennials are also most likely to have difficulty making a mortgage payment in the event of an emergency or if the primary earner in the household were to become unemployed.
"The truth about debt in Canada is that many homeowners are not prepared to adjust to rising interest rates, unforeseen expenses or interruption in their income," says Rick Lunny, President and Chief Executive Office, Manulife Bank of Canada. "However, building flexibility into how they structure their debt can help ease the burden."
Overall, nearly one quarter (24%) of Canadian homeowners reported they have been caught short in paying bills in the last 12 months. The survey also revealed that 70% of mortgage holders are not able to manage a ten% increase in their payments. Half (51%) have $5,000 or less set aside to deal with a financial emergency while one fifth have nothing.
1 The percentage change in average mortgage debt controlled for regional, age and income differences between the samples. However, different research providers were used for each wave of the study which may impact trended results.
Millennials not alone
Despite generally having more equity in their homes, many Baby Boomers face the same challenges as Millennial homeowners. Some 41% of Baby Boomers said that home equity accounted for more than 60% of their household wealth and for one in five (21%) it makes up more than 80%.
This indicates Boomers may need to rely on the sale of their primary residence to fund retirement, since much of their household wealth is wrapped up in home equity. However, more than three quarters (77%) of Baby Boomer respondents want to remain in their current homes when they retire.
"Many Boomers approaching retirement share the same lack of financial flexibility as Millennials," said Lunny. "They want to remain in their current homes, but their home makes up a big part of their net worth. Instead of downsizing, or even selling and renting, homeowners in this situation could consider using a flexible mortgage to access their home equity to supplement their retirement income."
Helped into the housing market
Almost half (45%) of Millennial homeowners reported that they received a financial gift or loan from their family when purchasing their first home. By comparison, just 37% of Generation X and 31% of Baby Boomers received help from family members when they purchased their first home. Conversely, almost two in five (39%) Boomers, many of whom are the parents of Millennials, still have mortgage debt.
The generational increase in new homeowners requiring family support comes despite a long-term trend toward two-income households. The number of Canadian families with two employed parents has doubled in the last 40 years, but housing costs are growing faster than incomes2.
"With higher home prices and larger mortgages, it's more important than ever to find the mortgage that's right for you," says Lunny. "A flexible mortgage that offers the ability to change or skip payments, or even withdraw money if your circumstances change, can help you ride out financial difficulties more easily."
Manulife Bank recommends that Canadians have access to enough money to cover three to six months of expenses.
2 Statistics Canada. May 30th 2016
Quebec homeowners most at risk
In addition, the Manulife Bank survey found that:
- Mortgage holders in Quebec (76%) would have the most difficulty with an increase of 10% to their mortgage payment and are more likely to be impacted should they have a fiscal emergency, as almost 30% have no emergency funds.
- British Columbia had the highest instance of homeowners getting help from family members when they purchased their first home, with almost half (45%) saying they either borrowed or were given money.
- Compared with other regions, homeowners in Manitoba and Saskatchewan (73%) prefer most to own and live in their current home when they retire.
Debt management should begin at an early age
More than two in five (44%) learned "a little" or nothing about debt management from their parents—and were also most likely to have been caught short financially in the past 12 months (28%).
"Kids who learn about money and debt management are more likely to become financially healthy adults," says Lunny. "One of the best lessons we can teach our children is the importance of saving for a rainy day. Being prepared for unexpected expenses is good for our financial health, good for our mental health and gives us the freedom and confidence to deal with the unexpected expenses and opportunities that come our way."
(Source: Manulife Bank)
Fluctuations in the real estate market caused by the UK’s vote to leave the European Union are likely to be shorter-lived and less severe than many investors fear, according to LaSalle Investment Management’s mid-year Investment Strategy Annual (‘ISA’) 2016.
The correction in real estate pricing is expected to be largely restricted to the next 18 months, and medium-term capital inflows into real estate will only be interrupted, not reversed, the ISA finds. It also suggests that, given the ultra-low interest rate and bond yield environment, UK real estate yields are only expected to increase by 40-50 basis points by the end of 2017, even if the country’s political landscape remains unclear. Meanwhile in Continental European, investors will continue to edge up the risk curve as long as the economic recovery continues largely unaffected, but will have one eye on risk contagion from the UK.
Overall, the ISA suggests that some of the fears currently surrounding the real estate market in the country may be overdone. Other findings include:
-The overall impact of Brexit on the Private Rented Sector (PRS) should be limited given the ongoing undersupply.
-Real estate assets with long, index-linked leases are likely to outperform over the next few years.
-The predicted capital market re-pricing will lead to an opportune time to enter the UK market – particularly for US dollar-denominated and Japanese yen-denominated investors.
Elsewhere in Europe, the headwinds facing London’s financial markets should help support the real estate market in cities such as Frankfurt, Paris, Dublin, and to a lesser extent Amsterdam and Madrid. Even before the impact of Brexit, office demand across Europe was undergoing a strong renaissance in cities with strong trends in Demographics, Technology and Urbanisation.
Globally, the ISA says the lower for longer situation actually boosts core real estate returns in the short-run, even as it dampens the long-run outlook for rental income growth. As a result, real estate values for stabilized assets in major markets outside the UK may continue to increase or hold steady, but the cyclical recovery in fundamentals will be moving much more slowly now. At the same time, cross-border and domestic capital sources in many countries could narrow their range of target investments to focus on these traditional, core themes.
Jacques Gordon, Global Head of Research and Strategy at LaSalle, said: “Across the globe, the fundamentals of supply and demand appear to be well-balanced going into the second half of the year in most of LaSalle’s major markets. Furthermore, turmoil in capital markets might also open higher-yielding buying opportunities from distressed sellers as the implications of the Brexit vote in the UK ripple around the world. Although the UK has been the epi-centre for political and financial tremors since June 24th, the law of unintended consequences suggests that investors should also closely watch for ripple effects in the EU, North America and even all the way to Asia-Pacific.”
Mahdi Mokrane, Head of Research and Strategy for Europe at LaSalle, said: “The UK, and in particular a dynamic London, home to one of the world’s most liquid, transparent, and investor-friendly real estate markets, is likely to reinvent itself outside of the EU, and the overall prospects for the UK outside the EU could well be broadly more positive than what is implied by current market commentators.
“We expect the forecast correction in real estate pricing to be largely restricted to 2016-17 and medium-term capital inflows into real estate will only be interrupted rather than reversed”.
(Source: LaSalle)
The financial sector has paid 465% markup for IT products.
Suppliers are exploiting a lack of transparency in the IT market to inflate product prices, according to the annual KnowledgeBus IT Margins Benchmark Study.
Now in its fourth year, the study shows that the practice of charging excessive margins by suppliers is still commonplace across the financial sector.
Identifying the best price for IT products is notoriously difficult, given the short lifecycle of products and the constant fluctuation of trade costs. Although industry best practice, as specified by the Society of IT Managers, states that organisations should not pay more than a 3% margin to suppliers.
Despite this guidance, the research revealed that one supplier successfully charged a financial company a margin of 465% for an order of memory sticks.
The study suggests that awareness of the high mark-ups charged by some suppliers may in fact be worsening. The average margin paid across the financial sector was actually found to have risen to 19% in 2015 from 14% in 2014.
This also compares unfavourably with the average margin paid across the board by buyers, which currently sits at 17.6%.
Al Nagar, head of benchmarking at KnowledgeBus, said: “Organisations are getting better at scrutinising purchases and negotiating better deals with suppliers. But the analysis shows the many purchases are far in excess of industry best practice.
“The most extreme example of excessive margins are regularly found on those lower volume, spontaneous, ‘as and when’ purchases. These are typically unplanned purchases consisting of items such as memory sticks, power adapters and cables.
“All procurement officers need to be aware of this trend. Although this type of purchase may be perceived to be of a lesser value, compared to major pieces of IT infrastructure, they can make up a good 25% of the IT budget. By the end of the year, this can easily add up to a six figure difference to the overall IT budget.
‘‘Today’s procurement managers don’t have endless amounts of time to talk to multiple suppliers to find the best price. What they need is for there to be greater transparency between suppliers and customers. With the right tools organisations can gain that transparency and bring those margins down to 3%.’’
For organisations looking to achieve best practice levels on IT product purchasing, Al Nagar offers three key tips:
1. Benchmark
Organisations can empower their negotiators, and speed up the IT procurement process, by deploying benchmarking tools. This provides IT buyers with access to up-to-date and validated trade level information that will identify the exact margins suppliers are charging.
2. Agree ‘cost plus’ contracts
Companies can agree ‘cost plus’ contracts with their suppliers to ensure no IT product purchased exceeds an agreed maximum margin level. Procurement teams can use their benchmarking tools to police these contracts.
3. Monitor price trends
By analysing historic or seasonal trade price trends, IT buyers can identify the best times to buy. When trade prices fall to their lowest, suppliers often try to maximise margins achieved, but by monitoring the market, companies can counter this practice.
(Source: KnowledgeBus)
Ashish Misra, Lloyds Bank Private Banking
April has seen the largest fall in sentiment towards UK government bonds, according to the monthly Lloyds Bank Private Banking Investor Sentiment Index. Net investor sentiment for the asset class declined five percentage points (-5pp) from last month to 16%.
UK corporate bonds has also seen a decline in sentiment amongst surveyed investors to 14%, a monthly decrease of 3pp. Sentiment towards UK and international shares, on the other hand, remains strong with investor outlook for UK shares sitting at 37%. US shares has edged up to 19% together with emerging market shares, increasing 3pp from last month. Amongst all asset classes, sentiment towards Eurozone shares recorded the largest monthly improvement of over 5pp, but the net balance remains in negative territory (-28%).
Ashish Misra at Lloyds Bank Private Banking, said: “Overall asset class performance paints a positive picture for investors as the average change has shown a steady increase since the start of the year. Interestingly, as UK government bonds decline, US shares have hit their survey high.
“However, Eurozone shares, despite gaining significant momentum, continue to display a highly negative sentiment. This momentum could reflect the quantitative easing by the European Central Bank. As the currency falls, sentiment towards the asset class has gone up with increased export and job prospects.”
In contrast to waning sentiment for some asset classes, market performance, in terms of returns earned, increased for all of the ten asset classes. UK property saw the largest monthly increase in returns of 7%, followed by Eurozone shares (+6%), UK shares (+6%) and Emerging market shares (+5%). UK corporate bonds (+1%), Commodities (+1%) and UK government bonds (+2%) provided investors with the lowest total returns in the past month.
Half of the ten asset classes have seen a fall in net sentiment over the past year. The biggest declines have been for Eurozone shares (-18pp), UK property (-11pp) and Commodities (-6pp). Gold recorded the biggest improvement in net sentiment (+7pp). There have also been gains for emerging market shares (+4pp) and US shares (+2pp).
