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Move is latest by a London landowning company to diversify its role

The Earl of Cadogan’s property company, which owns almost 100 acres of London’s Chelsea, is making a push into running hotels as it seeks higher returns and more control over hospitality in the high-end neighbourhood. 

The £5.4bn estate now operates five hotels with various partners, having added two new properties to the portfolio over the past year. 

Hotels have enjoyed a post-pandemic boost, making them one of the few areas of strength in the wider commercial property market and prompting a spate of dealmaking. 

For Cadogan Estates, the investments form part of a strategy to boost its returns by taking on riskier business ventures beyond its traditional role as a landlord.  

“The strategy on hotels is to take operational risk,” said Hugh Seaborn, the estate’s chief executive. He said the new approach was “very different to renting something out and letting someone else take the risk and the benefit”.

Playing a bigger role in operating the hotels would also give the estate more control over the mix of accommodation, restaurants and bars in the neighbourhood, Seaborn added. 

The move by Cadogan is the latest by large London-based estates to push into new ventures to boost returns. The Duke of Westminster’s Grosvenor estate in Mayfair and Belgravia has invested in operating more flexible workspaces and has also launched a new lending strategy. 

Cadogan’s latest hotel opening, in September last year, is At Sloane — a 30-bedroom, five-star hotel operated with French hotelier Jean-Louis Costes. The estate this year completed the refurbishment of the former Draycott Hotel, which it bought and rebranded The Chelsea Townhouse. 

The new properties add to an existing portfolio that includes The Cadogan Hotel — best known as the scene of the arrest of Oscar Wilde — which reopened in 2019 after a big refit. The estate traces its history back over 300 years to Sir Hans Sloane.

Cadogan reported on Wednesday that its operating profit, before capital items, increased 22 per cent to £120mn in 2023. The value of its properties increased 3 per cent — up from £5.1bn, adjusted for sales, purchases and capital expenditure. 

Its retail portfolio, which makes up the largest share of its holdings at 46 per cent, had its first full year of recovery from the Covid-19 pandemic. Retailers on the estate reported footfall and turnover were about 10 per cent above 2019 levels. Cadogan booked a 10 per cent increase in gross rental income from retail, rising to a record £96mn. 

Seaborn said the estate was seeing the benefit of financial support it extended to its tenants during the pandemic, including only charging restaurants rent based on their turnover, which helped those businesses bounce back. 

Cadogan also worked with the borough of Kensington and Chelsea — the UK’s wealthiest — to add 1,000 tables and chairs in the neighbourhood, which it has maintained. Seaborn said the changes had created “a much more alfresco atmosphere in Chelsea”.

A dispute between Porsche and its Chinese dealers highlights falling sales

Germany’s luxury automakers from BMW BMW 0.04%increase; green up pointing triangle to Mercedes-Benz MBG 0.53%increase; green up pointing triangle used to rule China’s streets. No longer.

A recent dispute between Porsche PAH3 0.40%increase; green up pointing triangle and its dealers in China has shed some light on the tricky situation for even some of the world’s premium car brands. According to local Chinese media, some of Porsche’s dealers refused to stock up more inventories and asked for additional subsidies from the company. Porsche, and its dealers in China, released a statement last week saying that they are facing complex issues and will work together to find effective ways to respond to market changes.

Indeed, Chinese car dealers are in pretty bad shape. Faced with a brutal price war, they have no choice but to offer deep discounts to customers. For example, gross profit margins on sales of new cars for Meidong 1268 1.51%increase; green up pointing triangle, a dealer for brands such as Porsche and BMW, fell to negative 0.6% in 2023, compared with a positive 6.8% in 2021. The Hong Kong-listed company has lost 94% of its value from its peak in 2021. Eventually this will mean the automakers will have to offer more rebates and cut into their own margins.

Porsche’s first-quarter deliveries in China fell 24% from a year earlier. It isn’t alone. Ferrari’s shipments to mainland China dropped 25% year over year in the quarter, too. Mercedes-Benz and BMW also sold fewer cars in China in the first quarter compared with last year.

The implosion of China’s housing market and the resulting economic slowdown has probably taken a toll on luxury spending. Brands such as LVMH and Gucci have also seen a slowdown in China lately.

But China’s car-buying habits have also undergone a seismic shift with the rapid rise of electric vehicles. Around 44% of cars sold in China in April were new-energy vehicles, which include plug-in hybrids, according to the China Passenger Car Association. German brands have long reigned supreme in China’s luxury segment. While they are still dominant there—the EV penetration rate for cars priced higher than 350,000 yuan, the equivalent of $48,300, was less than half the rate of the overall market at the end of last year, according to Bernstein—things could change fast.

In fact, for slightly cheaper cars, Chinese EV brands have been fast gaining share. Bernstein estimated that for cars priced above 250,000 yuan, the equivalent of $34,500, German brands had only a 45% market share in 2023, compared with a 60% share in 2020. Tesla has been taking share from them, but Chinese EV brands like Li Auto and BYD’s Denza have also been rolling out more premium models. German brands, by contrast, have been slower to introduce EV models. Increasingly, Chinese consumers are also looking for technology features such as infotainment or drive-assistance systems that are frequently paired with EVs.

China has long been a lucrative market for German luxury carmakers, whose prestige kept them in the fast lane. But now they need to work harder to avoid falling behind local rivals.

With earnings season over, analysts said resilient profit margins provided the biggest surprise, with numbers holding up firmer than expected

European companies showed tentative signs of an earnings recovery in the first quarter, leaving investors wondering if the region has turned a corner as it braces for a shift in monetary policy.

With earnings season over, analysts said resilient profit margins provided the biggest surprise, with numbers holding up firmer than expected after companies were able to cling to price increases despite slowing inflation.

Stocks in the U.S. and Europe have pulled back after rallying to record highs earlier this year as investors assess when major central banks will pivot to cut interest rates. The European Central Bank has signaled it will go ahead on Thursday, and its move will come against the background of an improving economy, cooling inflation and a corporate reporting season that turned out to be better than feared.

Earnings per share surpassed expectations in the first quarter, with 60% of Stoxx Europe 600 companies reporting numbers that beat consensus estimates, compared with the long-term average of 54%, according to data provided by LSEG I/B/E/S. In aggregate terms, earnings per share at Stoxx Europe 600 companies that reported results for the period declined 2.3% in the first quarter on revenue that dropped 4.1%, the data showed.

Leading the charge for European stocks was the financial sector, with banks giving the strongest push to earnings, Allianz lead investment strategist Jordi Basco-Carrera said. The sector enjoyed the biggest proportion of companies reporting earnings that beat expectations at 79%, according to LSEG I/B/E/S.

“European companies have been able to beat estimates overall, but the bar was set low,” Societe Generale’s head of European equity strategy Roland Kaloyan said. “Sales continued to disappoint, which isn’t a surprise for us because inflation continued to go down, and profit margin is right now the biggest surprise, because it continues to be quite high and resilient.”

The results came amid low expectations, with analysts having cut first-quarter views for the Stoxx Europe 600 in recent months, according to an aggregate of consensus estimates for individual companies provided by FactSet.

Still, first-quarter earnings gave analysts more confidence on the outlook for European companies, given that consensus expectations have stabilized after a cycle of downward revisions that began in late 2023, FactSet data shows.

The results also mirrored signs of a recovery for the eurozone economy which expanded 0.3% in the first quarter, following a 0.1% contraction in each of the previous two quarters. Put in the context of an economy that still isn’t buoyant, the earnings season was better than expected, Allianz’s Basco-Carrera said.

“This was a positive start to Europe’s earnings growth recovery, which we expect to continue in the coming quarters,” Morgan Stanley analysts said in a note.

For 2024 as a whole, analysts expect earnings-per-share growth of 4.6% and revenue to rise by 2.6%, signaling an improvement compared to the trends seen in the first quarter, according to numbers compiled by LSEG I/B/E/S.

Hesitation still remains concerning upgrades to expectations, with margins likely to come under renewed pressure this year as wage and commodity costs go up and outpace price increases, Societe Generale’s Kaloyan said.

“Analysts need to have more meat on the bones to upgrade, so we are in a wait-and-see mode now,” Kaloyan said.

But companies are feeling better about their prospects, with guidance sentiment improving among managers of European companies, HSBC equity strategists said in a note.

Financials look set to continue performing particularly well, Allianz’s Basco-Carrera said. Tech, luxury, defense and industrial companies benefiting from reshoring look set to perform well, while energy and materials face a tougher year, he added.

Meanwhile, European earnings could benefit from a steady rise in consumer spending as the cost-of-living crisis eases, which the European Commission expects to drive eurozone growth of 0.8% in 2024. And if the ECB goes ahead with a 25-basis point cut to interest rates on Thursday, as expected, this could provide another key boost, though strategists caution that this is likely priced in by companies and the market.

With earnings season over, analysts said resilient profit margins provided the biggest surprise, with numbers holding up firmer than expected

European companies showed tentative signs of an earnings recovery in the first quarter, leaving investors wondering if the region has turned a corner as it braces for a shift in monetary policy.

With earnings season over, analysts said resilient profit margins provided the biggest surprise, with numbers holding up firmer than expected after companies were able to cling to price increases despite slowing inflation.

Stocks in the U.S. and Europe have pulled back after rallying to record highs earlier this year as investors assess when major central banks will pivot to cut interest rates. The European Central Bank has signaled it will go ahead on Thursday, and its move will come against the background of an improving economy, cooling inflation and a corporate reporting season that turned out to be better than feared.

Earnings per share surpassed expectations in the first quarter, with 60% of Stoxx Europe 600 companies reporting numbers that beat consensus estimates, compared with the long-term average of 54%, according to data provided by LSEG I/B/E/S. In aggregate terms, earnings per share at Stoxx Europe 600 companies that reported results for the period declined 2.3% in the first quarter on revenue that dropped 4.1%, the data showed.

Leading the charge for European stocks was the financial sector, with banks giving the strongest push to earnings, Allianz lead investment strategist Jordi Basco-Carrera said. The sector enjoyed the biggest proportion of companies reporting earnings that beat expectations at 79%, according to LSEG I/B/E/S.

“European companies have been able to beat estimates overall, but the bar was set low,” Societe Generale’s head of European equity strategy Roland Kaloyan said. “Sales continued to disappoint, which isn’t a surprise for us because inflation continued to go down, and profit margin is right now the biggest surprise, because it continues to be quite high and resilient.”

The results came amid low expectations, with analysts having cut first-quarter views for the Stoxx Europe 600 in recent months, according to an aggregate of consensus estimates for individual companies provided by FactSet.

Still, first-quarter earnings gave analysts more confidence on the outlook for European companies, given that consensus expectations have stabilized after a cycle of downward revisions that began in late 2023, FactSet data shows.

The results also mirrored signs of a recovery for the eurozone economy which expanded 0.3% in the first quarter, following a 0.1% contraction in each of the previous two quarters. Put in the context of an economy that still isn’t buoyant, the earnings season was better than expected, Allianz’s Basco-Carrera said.

“This was a positive start to Europe’s earnings growth recovery, which we expect to continue in the coming quarters,” Morgan Stanley analysts said in a note.

For 2024 as a whole, analysts expect earnings-per-share growth of 4.6% and revenue to rise by 2.6%, signaling an improvement compared to the trends seen in the first quarter, according to numbers compiled by LSEG I/B/E/S.

Hesitation still remains concerning upgrades to expectations, with margins likely to come under renewed pressure this year as wage and commodity costs go up and outpace price increases, Societe Generale’s Kaloyan said.

“Analysts need to have more meat on the bones to upgrade, so we are in a wait-and-see mode now,” Kaloyan said.

But companies are feeling better about their prospects, with guidance sentiment improving among managers of European companies, HSBC equity strategists said in a note.

Financials look set to continue performing particularly well, Allianz’s Basco-Carrera said. Tech, luxury, defense and industrial companies benefiting from reshoring look set to perform well, while energy and materials face a tougher year, he added.

Meanwhile, European earnings could benefit from a steady rise in consumer spending as the cost-of-living crisis eases, which the European Commission expects to drive eurozone growth of 0.8% in 2024. And if the ECB goes ahead with a 25-basis point cut to interest rates on Thursday, as expected, this could provide another key boost, though strategists caution that this is likely priced in by companies and the market.

To increase investments across its portfolio of brands, including Hanes, Bonds, Maidenform, and Bali

Hanesbrands HBI -2.13%decrease; red down pointing triangle has agreed to sell its Champion business to Authentic Brands Group in a deal valued at up to $1.5 billion.

The apparel brands company said Wednesday it has signed a definitive agreement to sell the intellectual property and certain operating assets of its Champion business for a transaction value of $1.2 billion, which could rise up to $1.5 billion based on reaching certain performance thresholds.

The decision to sell the segment follows an evaluation of a range of strategic options for the global Champion brand.

Once the transaction is completed, Hanesbrands said it plans to turn its attention to the innerwear category and generating higher growth through improving products and increasing investments across its portfolio of brands, including Hanes, Bonds, Maidenform, and Bali.

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Lie back and think of England’s infrastructure

Thames Water’s potential collapse is top of “Sue’s shit list”, the risk register compiled by Labour chief of staff Sue Gray of problems a new government will have to tackle immediately.

But the problem is much wider, because the same financing model now wobbling at Thames Water is underpinning a lot of British infrastructure. The water sector relies on whole-business securitisations based on their regulated assets. So does Heathrow Airport.  New projects like the proposed Sizewell C reactor, a key part of the UK’s net-zero plan, will apply the same model.

The Regulatory Asset Base (RAB) model employed in the Heathrow funding is practically identical to the Regulatory Capital Value (RCV) model employed in the water sector.  The relevant regulator (Civil Aviation Authority for Heathrow, Ofwat for water) determines the capital base of the company then sets its permitted returns, assuming a certain level of gearing and reasonable returns on the assumed levels of equity and debt. 

As of the 2022 Annual Report for Heathrow Finance PLC, the airport’s RAB was £19.18bn.  It is geared at 64.9 per cent for Class A senior debt, with a further junior Class B debt taking gearing up to 76.0 per cent, so there’s 24 per cent equity in the structure.  This may look high, but it’s acceptable in stable assets, and gearing itself is not the problem.  

The problem is that within the whole-business securitisation structure, a company needs to issue new debt continuously to replace that which matures.  Page 187 of the annual report showed that at the 2022 year-end Heathrow had £1.23bn of debt repayable within one to two years and £3.42bn repayable within two to five years.  Anything which threatens the market’s belief in the RAB/RCV model has the potential to become a real problem really quickly.

In light of the contagion risks, a solution for Thames Water is needed with some dispatch.  Fortunately one is in sight, which is more appealing than the blunt instrument of the Special Administration Regime, which is a form of temporary nationalisation.  That route is possible but would do little to shore up confidence in the RAB model.  Some form of lenient treatment is needed for Thames Water, despite the substantial public unpopularity that will ensue.

The Lex column raises a valid objection: one cannot be seen to accord special treatment to Thames because the other companies will complain about unfairness, and subject the regulator’s determination to judicial review.  But delays are unendurable, given the risks elsewhere, let alone the disturbing prospect that the judicial review could succeed.

So Thames needs to be given special treatment without being seen to get special treatment.  A way to approach this problem is on vaguely philosophical terms, where forbearance is fair in proportion to its size.

Thames has the most customers, the highest volumes of supply (and leakage) and the longest network. One could imagine deploying some form of special regime which could loosely be phrased as “leniency per metre of pipe.”  This will take some selling to the public, but is cute enough to sidetrack a lawyer. A party seeking judicial review would start by taking advice on the prospects of success and their brief would want a simpler story than “pipe length is not a relevant metric”, because why?

Stakeholders in Thames appear to have gone in different directions.  Old players in the equity have been joined in the debt by Elliott Management, a specialist in distressed situations that has a healthy appetite for risk and litigation.  

Canadian pension fund OMERS has somewhat uncharacteristically flounced out in a tizzy, writing down its investment to zero and withdrawing its board representative, which looks at least in part performative. Elliott can be seen to represent the smart money, and the resolution it’s likely to favour is one that protects the RAB model.  That would provide significant windfall profits for a “vulture fund”, which would again be highly unpopular, but only if anyone finds out about it. 

Throughout Thames’ special regime period, securitisation debt should remain in place.  Replacing it with either non-securitised debt or equity would be somewhat or massively more expensive, respectively, because the security package achieves a better rating than unsecured debt.  That should help calm the Debt Management Office, where according to a Guardian report the civil servants are worried about spillover effects and a broader loss of confidence.

There are plausible scenarios where Thames’s failure impedes the UK’s ability to maintain critical infrastructure and move to net zero. None of the available solutions will please everyone, but at least we can now begin to see a workable way forward, even if it means rewarding the shareholders who have been able to hold their nerve.