Quarterly Investor Report

Economy & Strategy

Keills Property Trust | 30 September 2015

Great Muddle Through

Throughout our investment careers, we have always made our best investment decisions when we have a clear view on where inflation is headed.  Get that right and you probably get bond yields correct and are on the right track with economic growth.  This allows you to determine whether the next investment you make will be given a gentle push by the economy or otherwise.  The timing of any economic support or slump is also helpful when looking at the expected hold period.

Today how do we see things?  We now operate in a truly connected global economy and despite current domestic discussion on whether the UK will stay or leave the EU, the big picture of the US and Chinese economies seems dominant.  Worries about the mounting global mountain of debt and how interest rate rises may affect debtor nations, is high on the agenda for Janet Yellen of the Fed.  The decision on when interest rates will rise (on either side of the pond) has been kicked down the road again and having introduced Zero Interest Rate Policies, Governments are wondering about how to get out.

Bond markets happily arbitrate over such deliberations and currently point to the next interest rate rise in the UK being sometime in 2017.  We would even stick our neck out and suggest it could be later still.  Until recently, jobs data in the USA and wobbles in China, suggested that the Fed would gently pump rates up a notch in September.  This too has been deferred, with many thinking we will have to wait well into 2016, if not longer.

Investors who prefer to look beyond the end of their nose will recognise that what is happening is simply part of the Great Muddle Through, our preferred name for the current economic period.  We believe that there is a need to deleverage globally which means we need to stop debt rising.  One step towards achieving this, is to collect more in taxes than is spent or, simply spend less.  Different countries are at different stages of the process, but overall this is the direction of travel.  The alternative is to bequeath an even larger debt to the next few generations who are already struggling with higher house prices and in the future much higher pension costs.

Following our reading of the economy we update our suggested reading list on the Keills website from time to time.  Generally speaking, many books offer an historical perspective often comparing The Great Muddle Through to earlier periods of economic woe, for example the Great Depression.  In making such comparisons policy makers often conclude that to avoid “such and such” you must or mustn’t do “this or that”.  Like the short-sighted investor above, the policy maker is really only looking a few yards down the road.  The quantum of debt that we must deal with, both relatively and in total, is unsurpassed in recent history.  The electoral cycle of 4/5 years in most countries is simply not designed to cope with such extremes and hence this time needs a different, more long term approach.

At the same time the world has become connected.  A recent radio programme examined the question of borders throughout the planet and a comparison was made between Berlin in the early 1960’s and the Indian/Pakistan border in 2093.  The first period was fraught with cold war diplomacy and Berlin was being further divided as nations juxta positioned their ideas not knowing that a few years later the Berlin Wall would be pulled down both ideologically and physically.  It was predicted that in 2093 the India/Pakistan border will be the last border to fall.  With a mobile global population, individuals could live anywhere and countries would be happy to accept migrants who can contribute.  This may never happen, as the current migrant crisis suggests, but it does give food for thought and there will be implications for land ownership.  Suddenly, the human race is very much in control of how and where they occupy the planet and this will have profound implications for everything we do.  We are only beginning to touch on sustainability but we believe that quite soon, these issues will become core.

UK Property Market


We find ourselves in London regularly and often share experiences with friends and business contacts.  Some live there, some commute and others, like us, drift in and out from time to time.  London is booming.  Businesses are expanding, taking on new staff and there are cranes all over the City.  House prices continue to rise making London unaffordable for many working there, albeit the Stamp Duty changes appear to have softened the prices of homes over £1m.  Without the bank of mum and dad, many young people wouldn’t stand a chance.  New businesses are sprouting up including household names such as the UK arms of Facebook and Alphabet and technology hubs are forming where these new businesses can feed off each other.  Old Street roundabout is hardly California but hey …. the same mad house price thing is happening in California too.

London has become a proxy for much that is good and bad in the economy as a whole.  The good is that it demonstrates how innovation and growth can be almost a perpetual merry-go-round.  The bad, is that if you fall off that merry-go-round, or worse were never on it, then you will struggle to keep pace and become detached.  And so it is for the property market.

UK Wider Property Market

Rather than whistle through the traditional sectors of the market (industrial/warehouses, retail, and offices) we will, from now on, look at the market as a whole.  The sectoral split came about as a consequence of property trying to compete for capital with other asset classes.  Traditionally, equities analysts have split their market into various sectors such as oil, miners, big pharma etc.

Looking back over the years, there has been quite a divergence in returns from the traditional property sectors but someone looking at returns from afar may say that they were much the same from an asset allocation perspective.  There is more of a spread of returns within each sector than between the sectors themselves and due to the non-homogeneous nature of each property (each deal is different) you are best focussing on deals rather than sectors.

To obtain diversification, you are best to simply have a portfolio of properties with a variety of tenants and keep a good eye on it.  This is a philosophy we have adopted consistently.  As a property owner you are in control of the asset, you can make and effect decisions about what to do with that asset.  In an era where we expect little (no) rental growth over the medium term (5 to 10 years) except in pockets (eg London), the opportunity for doing much, other than collecting the rent, is modest.  Therefore the solution is to find good quality assets which are cheap for investors to run over the long term and collect the rent.  Find quality tenants who are prepared to pay an indexed rent.  And finally, find a location where a tenant actually wants or needs to be, a location that is its natural home.  Our strategy remains unchanged and embraces all of the above.

Other news

The Trustee (Royal Bank of Canada Trust Corporation Limited) has written to advise that they wish to retire and RBCTC has identified a new Trustee, Vistra, who will also employ our current principal contact from RBC.  RBC has offered to pay all costs associated with the transfer and Keills Property Trust must therefore consider what to do.  Essentially, the choice is to stick with the existing people when they transfer to Vistra and move at no cost to the Trust or, test the market for an alternative Trustee.  Keills Property Trust is still relatively small and we are conscious of minimising costs to members.  On the basis that there is no cost to members we are prepared to support the proposed change but the decision is one for the unitholders ultimately by way of a vote.  Magarch, as Trust Manager will issue details on the process in due course.