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Q3: OCT 2015
A BULLETIN FOR CHARITIES
ECONOMIC
OUTLOOK
BRIEFING
INTEREST RATE RISE: WHEN WILL IT HAPPEN?
briefing) but also have an impact on the wider
economy, which in turn will have knock on effects
for the sector.
One of the biggest areas of uncertainty in the UK
economy has been when the rise in interest rates will
take place. UK interest rates have been held at historic
lows for six years and most forecasters assumed that
strong growth in 2014 and early 2015 would lead to
interest rate rises later in the year. However weakness
in key export markets, particularly the European Union
and low oil prices which have kept a lid on inflation
have meant that interest rates have been kept lower
for far longer than had been originally predicated.
Lower interest rates will have an impact on charities
investments (as outlined in later sections of the
Predicated path for UK Interest Rates
Lower interest rates should help household incomes,
particularly consumers, with those charities that trade
with the public enjoying the benefits of better enjoying
the benefit of more conducive spending environment
for longer. Charities that have borrowed to invest in
developing their organisations will also benefit. Low
interest rates also signal confidence that inflation will
remain lower for longer, helping pounds stretch further
November 2015 (BoE)
November 2015 (NIESR)
August 2015 (BoE)
during a time when charity resources have been
significantly squeezed. However charities with
sizeable deposits will continue to struggle with low
returns. Low interest rates will also contribute to a
weaker pound relative to other international currencies
potentially having significant impacts on the work
of charities that deliver services overseas. There
continues to be uncertainty around when the rate rise
will come, with the latest Bank of England Inflation
Report pushing back the predicted first interest rate
rise to Q3 2016 from Q1 2016. Whenever it comes,
charities will need to be ready to adapt.
November 2014 (BoE)
2.5
HEADLINES
2
UNEMPLOYMENT DOWN
TO 5.4%
1.5
1
GDP GROWS BY 0.5% IN Q1
0.5
0
Q4
Q1
Q2
2015
Q3
Q4
2016
Q1
Q2
Q3
Q4
2017
Q1
Q2
Q3
2018
Q4
Source: Bank of England, NIESR
SPONSORED BY:
Charity Finance Group
www.cfg.org.uk
[email protected]
0845 345 3192
Design: Steers McGillan Eves
WHAT IMPACT COULD
INTEREST RATES HAVE ON
INVESTMENTS?
HOW WILL NEW FUNDRAISING REGULATION HIT
CHARITY FINANCES?
TRENDS & TRAJECTORIES
GDP
GROWTH
Q3 2015
VITAL
SIGNS
UNEMPLOYMENT:
5.4%
Unemployment is continuing to
fall gently. However, some of
these falls are tapering off. For
the 3 months ending August
2015 the highest rate of unemployment in the UK was in the
North East (8.6%) and lowest
in the South West (4%).
CPI INFLATION:
0.5%
AGING
£92.9 POPULATION
compared to 0.7% in Q2. This slower than
expected growth has been caused by sharp
contractions in production industries and
construction. The domestic services sector,
which expanded by 0.7% in Q3, continues
to be the main contributor to growth.
Source: ONS
-0.1% BILLION
In the year to September 2015,
down from 0% in the year to
August 2015. This is predominately driven by discounting
by retailers and falling motor
fuel prices.
WHAT DOES THIS ALL
MEAN FOR CHARITIES?
In October the ONS estimated that the
number of people aged 90 and over has
reached 470,405, up from 330,572 in 2002.
71% of people over 90 are women.
The deficit on the UK’s current
account balance widened in
2014. This was the largest
annual deficit since records
began in 1948.
INTEREST
RATES:
0.5%
Interest rates have remained
constant and the Asset
Purchasing Programme has
remained at £375bn.
470,405
PEOPLE AGED 90 AND OVER
Source: ONS
The continued fall in unemployment is welcome
news for charities – lower levels of unemployment
should support economic growth and translate into
improvements in household disposable income.
The regional differences in employment figures
are of note. In relatively deprived areas – where
we typically see higher levels of unemployment
such as the North East – there are fewer voluntary
organisations in proportion to the population. In
terms of demand, charities providing services in
the North East are likely to experience greater
pressures on their services.
Although economists predict that the Bank of
England will tighten policy early next year, some
forecast this move slightly later in 2016 as inflation
remains low and uncertainty over when the US
Federal Reserve will hike up interest rates continues.
Charities will benefit from sustained low costs of
utilities and goods as inflation dipped below 0% for
the second time in September this year. However,
low inflation is indicative of the fragility of the UK
and global markets, making it harder for charities
to secure good returns on investment.
Latest figures show the current account deficit
widened to 5.1% of nominal GDP in 2014. This is
symptomatic of the fall in exports and reliance
on domestic consumption. High current account
deficits make economies more fragile, and gives
governments less room for manoeuvre in terms
of economic stress. In a bid to achieve a budget
surplus by 2020, the government has outlined
£37bn worth of spending cuts over this Parliament.
There is concern that the slower than expected
growth in GDP could give the Chancellor rise to
announce further cuts to ensure they reach this
goal. This will not only further dent spending on
charities but may also equate to higher demand
on services as government departments and local
government look to cut non-essential services.
The ageing population poses two challenges to
charities. First, it threatens to compound the
sector’s pension deficit (currently valued at
£1.6bn). Second, the number of people needing
support will increase, and the nature of the
services required will change, thereby placing
increasing strain on charity finances.
SECTOR INSIGHT: A FUNDRAISING DOWNTURN
ANDREW O’BRIEN, HEAD OF
POLICY & PUBLIC AFFAIRS AT
CHARITY FINANCE GROUP ASKS
WHETHER AND HOW THE CHARITY
SECTOR SHOULD PREPARE FOR
A FUNDRAISING DOWNTURN.
A RAY OF LIGHT
So far one of the few rays of light for the
finances of the charity sector has been
the continued generosity of the public
and holding up of fundraising income.
example, the Civil Society survey into charity
shops showed a worrying drop in profitability.
According to the survey, the profits of charity
shops increased by 1.4% overall in 2015.
This is compared to its peak in 2012 – 14.3%.
Around 43% of charities saw profit growth
decline in 2015. Although only one part of
the fundraising strategy for the charity sector;
the move towards trading with the public
had been one of the biggest shifts since the
recession and the fall in profitability is an
early warning sign that growth in this
sector is not guaranteed.
However, the summer of discontent on charity
fundraising is likely to have the biggest long
term impact on charity finances. The RNLI has
reported that it expects its opt-in policy for
communications to see it lose around £7m a
year or 4% of its income – costing £36m by
2020. Even before the Etherington Review was
concluded, a number of charities had said that
restrictions on frequency of communications
With public funding for charities under
considerable pressure due to the government’s could cost their organisations millions of
pounds a year. Other charities are also in
deficit reduction strategy, charities have had
to rely more on fundraising and donations from the process of calculating the cost of new
the public. Looking ahead, with the government rules on fundraising income.
likely to announce further spending cuts at the If there was a 4-5% fall in donations and
upcoming Autumn Statement, this isn’t likely
fundraising income across the charity sector
to change anytime soon.
this would cost between £440-500m. If this
turned into a long term loss of revenue, it
However the charity sector has suffered
could cost charities billions by 2020. At a
a significant level of negative press attention
time
when the charity sector is already facing
on fundraising over the summer which
a £4.6bn funding gap due to a combination
some believe has damaged public trust
of inflation and continued falls in government
and confidence in charities. There has also
revenue. It will add to the financial difficulties
been a review into the fundraising regulatory
facing charities.
landscape by Chief Executive of NCVO,
Sir Stuart Etherington. This review has
IS FURTHER REGULATION LIKELY?
recommended toughing up the regulations
The Etherington Review had already proposed
around fundraising.
a number of changes that may reduce the
income of charities; the most controversial is
A PERFECT STORM?
the Fundraising Preference Service (FPS)
Even before the press attention on charity
which would prevent charities from contacting
fundraising there were indications that some
those that put themselves on the list – even if
revenue streams were under pressure. For
According to a review into the financial
sustainability of the charity sector carried out
by NCVO and supported by CFG – fundraising
income has held steady at around £4bn a year
since 2007/08. Donations have also remained
steady at around £7bn a year, around where
they were at their peak in 2010/11.
they are registered supporters. There is
also the potential cost of the new Fundraising
Regulator which will be an additional bill for
fundraising charities.
There are continued concerns around
reporting and monitoring of fundraising
requests at a governmental level. Additional
reporting requirements could build in new
hidden costs into the fundraising process.
However the government has not said that
it has finished dealing with this issue and
charities will have to cope with continued
regulatory uncertainty that will affect
future planning.
WHAT CAN CHARITIES DO?
The fall in government income means that
charities cannot turn to the state for support
leading to even greater competition between
charities for dwindling resources.
There may also be movements towards
less regulated areas such as trading with
the public, consultancy and corporate
partnerships. However all these forms of
income are not particularly large and could
not on their own make up for a depression
in fundraising income and donations.
Another growth area since the recession
has been charging for services, which has
already been responsible for 98% of the
sector’s income growth since 2008/09.
However this is not something charities
can transition to overnight and may have
negative impacts on service users. For most
charities, the plan will be a combination of
further belt tightening and squeezing suppliers
to maximise resources. But after five years
of tough financial conditions a lot of the
low hanging fruit has already been picked.
A downturn in fundraising is the last thing
that charities need.
Andrew O’Brien
Head of Policy & Public Affairs, CFG
SECTOR INSIGHT: HIGHER RATES AND COMMERCIAL PROPERTY
JEFFREY MATSU, SENIOR
ECONOMIST, ROYAL INSTITUTION
FOR CHARTERED SURVEYORS,
WRITES ABOUT THE POTENTIAL
IMPACT OF HIGHER INTEREST
RATES ON COMMERCIAL
PROPERTY INVESTMENTS –
A GROWING MARKET
FOR CHARITIES.
Economic recovery in the UK has broadened
sufficiently for monetary policy to initiate a
process of normalisation. With close to full
employment, real wages accelerating, growth
near its potential, and business investment
robust, a sensible strategy would indeed be to
extend the expansion through a slow but steady
tightening. While the precise timing of lift-off
is debatable, we expect the Bank of England
to increase its policy rate in 25 basis point
increments twice yearly starting summer 2016.
At this pace, the Monetary Policy Committee is
unlikely to reach what it considers to be the
terminal rate until sometime in 2019.
Broad fundamentals are supportive for real
estate in an environment where economic
growth is improving and supply remains
limited. Strong investor demand throughout
the UK continues to exert downward pressure
on commercial property yields amid solid
rental income growth expectations. According
to the most recent RICS Commercial Property
Market Survey, demand for leasable space
rose in 2Q 2015 for eleven successive
quarters whilst available space fell for its
ninth consecutive quarter. This mismatch
has driven a firm trend in the rental
environment and buoyed projections on
the direction of rents. Survey data show
that over the coming year, the office sector
will experience the sharpest growth with
expectations firming across both prime and
secondary markets.
A majority believe that commercial real estate
is in the midst of an early upturn in the property
cycle. This contrasts with the London market
Meanwhile, demand in commercial property
where a majority of respondents perceive
continues unabated with investment enquiries
valuations as above fair value and entering
exceeding pre-financial crisis levels. The limited
the peak stage of the upswing.
pace and magnitude of rate hikes expected in
the coming two to three years may slow this
Against this background of strong market
pace of acceleration, but overall prospects for
performance and a stabilisation of economic
the sector should remain undimmed. Interest
growth at near trend levels, the commercial
from overseas buyers continues to rise as well, property market is well positioned to weather
particularly in prime office and retail, and this
modest increases in interest rates. The key
risks to this call would be stronger than
trend toward safe haven assets would be
anticipated monetary or fiscal tightening, a
supported by any further financial market or
weaker than expected occupier market, and
economic growth uncertainties in external
heightened uncertainty such as an exit of the
markets such as China. Coupled with the
UK from the EU (thereby crimping business
limited availability of properties for sale,
investment). While the impact of a Brexit is
capital values across all property segments
are projected to see sizeable appreciation both currently being underestimated, as is the
near term and over the next twelve months.
possibility that the Bank of England may
As household income growth begins to slow
already have fallen behind the policy curve,
in 2016, however, lower consumer spending
we view these outcomes as unlikely based on
may affect retail property disproportionately.
our current assessment of market dynamics
Potentially most sensitive to rate hikes would
and economic fundamentals.
be the secondary retail market. Regional
Charities can access RCIS’s free Charity
variations in investor sentiment and capital
Property Helpline designed to assist charities
value expectations should also factor into asset and voluntary organisations, by providing
allocation and the potential rebalancing of a
support and guidance on all property matters
property portfolio. Across the UK, 90% of our
in the UK.
survey respondents view current valuations
Call 0870 333 1600.
as either at or below fair market value.
THE LIMITED PACE AND MAGNITUDE OF
RATE HIKES EXPECTED IN THE COMING
TWO TO THREE YEARS MAY SLOW THE
PACE OF ACCELERATION, BUT OVERALL
PROSPECTS FOR THE SECTOR SHOULD
REMAIN UNDIMMED.
SECTOR SNAPSHOT
10
MILLION
8
6
4
The amount of money that Children in
Need have raised since 1980 to help
disadvantaged children and young
people around the UK.
2
11
20
11
/1
2
20
12
/1
3
/1
0
20
10
/
9
09
MILLION
TRUSTEES IN
Source: Charity Commission
Source: BBC
£500
50% 943,000
The amount the current
budget for the Charity
Commission has fallen
since 2007/2008. Further
cuts are expected in
the upcoming Spending
Review on 25th November.
20
8
/0
08
20
07
/0
20
/0
7
6
20
06
5
/0
/0
05
04
20
03
20
20
3
/0
/0
2
02
20
00
20
4
0
20
Source: NCVO Almanac 2015
£790
Voluntary sector investment income 2001/02
to 2012/13 (£billions 2012/13 prices)
12
/0
1
Charity investment income has begun
to recover but still remains below prerecession levels. In 2012/13, investment
income represented 7.2% of the sector’s
total £40.5 billion income. Greater
levels of investment income tends to
benefit larger organisations and those
organisations which have an endowment.
Voluntary sector investment income 2001/02
to 2012/13 (% of total voluntary sector income,
2012/13 prices)
01
/0
CHARITY
INVESTMENT
INCOME RISING
ENGLAND AND WALES
THE TOTAL INCREASED
COST OF THE NEW
NATIONAL LIVING WAGE
TO THE SECTOR BY 2020.
This is compared to 450,000 teachers
and 274,000 registered doctors
£100,000
has been set aside by the Cabinet
Office to help increase the fundraising
capability of small charities through
subsidised training courses. The
training will be delivered between
February and June 2016
This figure will be higher once
NI and workplace pension
contributions are added.
Source: Charity Commission
ASSETS AND LIABILITIES
OF CHARITIES 2012/13
Assets are critical for the work of the charity sector. 89% of
charities hold some form of asset which they use in their work
or to generate income. This adds additional concern for charities
ahead of the Spending Review where the Chancellor is likely to
review business rates and may make further changes to the charity
sector’s rate relief. The sector’s assets are worth a net £105 billion,
which equates to 1.4% of the UK’s net assets in 2013.
Asset values have recovered since the recession but this has
not been evenly distributed, with the North of England seeing
slower growth compared to the South East and London.
Source: NCVO Civil Society Almanac 2015
Source: TSRC
Source: Cabinet Office
Billions, 2012/13 prices
120
22,000
100
80
60
The number of charities that will
go through auto-enrolment
from 2015 onwards.
40
20
0
-20
Liabilities
Current
Assets
Fixed
Assets
Net
Assets
Source: Institute of Fundraising
INVESTMENT OUTLOOK
CHINA’S SLOWDOWN AND THE
PROSPECT OF RISING INTEREST
RATES HAVE HEIGHTENED STOCK
MARKET VOLATILITY. NICOLA
BARBER, HEAD OF CHARITIES AT
JAMES HAMBRO & PARTNERS,
DISCUSSES WHAT RATE RISES
MEAN FOR CHARITY INVESTMENTS.
From an investment perspective, rising
interest rates could easily be perceived as
a coming storm – something to shelter from.
It might be more helpful to think of them
merely as a sign of a changing season.
Janet Yellen, the Chair of the Federal Reserve,
has made clear that the US Central Bank will
raise interest rates only when inflation is
heading towards 2% and the country is enjoying
close to full employment. With inflation close
to zero and unemployment at around 5%, this
may not happen till next year. The UK is likely
to follow suit rather than lead the way. So,
though we’ve been expecting interest rate
rises for some time, the wait continues.
Yellen and Bank of England Governor Mark
Carney have made clear that when rises do
come, they are likely to be limited and gradual.
As economic confidence remains fragile, this
should be reassuring, but even incremental
changes may unsettle the markets.
Beyond the investment arena, rising interest
rates present challenges for those charities
that borrow, while increasing returns for
those with cash deposits.
The following reflections may be useful in
informing your conversations with your
investment managers.
Rising interest rates are not usually good for
conventional government bonds – you have
typically committed to a fixed rate of return and
if interest rates rise, other asset classes, such
as cash, become relatively more attractive. If
this occurs along with rising levels of inflation
then the real (after inflation) value of the bond
will also fall. From a starting position where
bonds are priced at historically high levels,
largely as a result of a concerted effort by
central banks to stimulate economies by
programmes of Quantitative Easing, rising levels
of interest rates and inflation may prompt investors
to reconsider the merits of this asset class.
BEYOND THE
INVESTMENT ARENA,
RISING INTEREST RATES
PRESENT CHALLENGES
FOR THOSE CHARITIES
THAT BORROW, WHILE
INCREASING RETURNS
FOR THOSE WITH
CASH DEPOSITS.
Our preference in the fixed interest area is for
high quality strategic corporate bond funds and
index linked bonds rather than high yield, sub
investment grade or emerging market debt.
Interest rates affect currency markets too. As
widening interest rate differentials may lead to
a stronger dollar, it is no accident that some of
our fixed income exposure is in US Treasuries.
Equities typically outperform during the early
stages of the Fed’s tightening programmes
as the economic conditions are perceived as
favourable. The key however, will rest on the
valuation of equity markets which, in the US,
presently look expensive to us. This is part of
the reason we have recently added to our
European and Japanese equity weightings.
But remember, the performance of a market
index represents a random walk comprising
several hundred companies some of which
will be winners and others losers. Historic
sector beneficiaries of rising interest rates
have included financials – banks can increase
their margins when interest rates are higher,
improving profitability and the consumer
discretionary sector as higher rates are perceived
as a sign of economic growth and higher levels
of employment, resulting in greater confidence
and increased levels of spending.
Within our direct equities we are also
positioning portfolios to avoid heavily indebted
companies, focusing on those that generate
plenty of cash (and can increase prices if
necessary) to support progressive dividend
policies and reinvest to create further
shareholder value.
Looking further afield, we believe (at the time of
writing) that there will be better opportunities to
invest in emerging markets and commodities.
Amongst alternative assets, we are already
seeing a cooling in London prime commercial
property which may be exacerbated in a rising
interest rate environment, with capital values
rolling over as a consequence. But there may
still be selective opportunities elsewhere –
provincial shopping centres for example.
So, rising interest rates can bring positives and
new opportunities – they are a sign of ‘summer’
in the market cycle. But summer is followed
by autumn and as markets begin to price in
expectations it is always sensible to evaluate
the investment strategy and focus on the
medium term fundamentals and prospects
for asset class returns.
Nicola Barber
Head of Charities at James Hambro & Partners (JH&P).
She is also a trustee and chairs the investment committee
of the Citizens Advice pension scheme.