Quarterly Investor Report

Economy & Strategy

Keills Property Trust | 31 December 2015

Another year passes and still the bells of the Global Financial Crisis (GFC), which began in 2007/2008, ring true.  Debt levels increased further in 2015 for Governments, Corporates and individuals alike.  The Global Economy was dominated by a stuttering China and USA interest rates eventually being raised by 0.25% at the Fed’s December meeting.  Far from signalling an end to the GFC, Mario Draghi of the European Central Bank had to again say that he would do ‘whatever it takes‘ to keep Europe ticking forward and late in 2015 Europe finally undertook Euro bond purchases.  The earlier Greek turmoil did not turn to tragedy.

The collapse in the oil price from over $100/barrel in 2014 to nearly $30 will have global implications both economically and politically.  It has already hit the major producer nations with Saudi Arabia in particular enduring a shock to its economy.  One solution the Saudis are rumoured to be considering is the part flotation of their Government owned oil producer, Aramco.  Such a move has the potential, in one stroke, to create the world’s largest listed company by value.  The effect of a lower oil price impacts everyone, much like a one off tax cut for everyone and while oil producers lose, manufacturers, distributors and transport all win.

Other big events were on the political front with ISIS in Syria dominating and terrorist attacks in France, USA, Tunisia and Egyptian airspace.  As the world becomes a more crowded place with such a big discrepancy between the ‘haves’ and the ‘have nots’, we see these events increasing if democracy and freedom to travel continue to evolve.  Containing the will of people is difficult and frowned upon by developed countries.  The problem is that once a country becomes rich, its citizens don’t want to lose a certain living standard.  Equally, wealthy citizens are usually happy for others to become wealthy too.  For the next few generations, success will mean the management of these sometimes opposing ideas.   We have drifted into philosophy and politics, but increasingly these form a significant part of our economic outlook and perspective.

In the UK, Mark Carney, Governor of the Bank of England, played with interest rate expectations well, lining people up for an interest rate rise before the year end only to gradually make such action less certain, before confirming that a rate rise in 2017 was more likely.  Our Chancellor, George Osborne, has had little to play with.  Tax receipts have been underwhelming and the lower than expected growth has forced him to kick back the date for a balanced budget to the end of the current parliament.  More radical engineering of Social Security benefits were kyboshed by the House of Lords which may extend the date of balancing even further.

Before continuing, it is worth reminding ourselves (again) that we are living through a very different period experienced by most investors alive today. When the GFC erupted, Governments worldwide set about strategies to lessen the impact on ordinary people.  Laudable as this may have been, the effect has dramatically increased the price of assets with the emphasis on those bought with debt.  Property in particular has been a major beneficiary of zero interest rate policies (ZIRP) and Quantitative Easing (QE).  This asset price boom has certainly helped many banks and borrowers alike and prevented forced sales at rock bottom prices.  Looking forward, we are concerned about how this unwinds and the effect on the wider economy more generally.  Interest rates may rise later this year but remember it is over 400 years since they were previously at this level.  In economic terms at least this period remains highly unusual.

UK property market

As we outlined in a recent report, we do not focus on individual sectors of the market, believing it is much better to seek out investments with long term income sustainability wherever they may be.  As investors (all creeds) bought more heavily into the property market throughout 2015, yields continued to fall as demonstrated in the table below.

The search by investors for yield remains strong and we believe this will continue during 2016.  Various agents report a year of record transactional activity, with a strong geographic centre on London and the South East.  UK institutions have had to compete with overseas buyers for the best investments and there is some evidence that the pressure of investing funds is causing investors to be less discriminate.  This rally has been driven by new capital and not by lax property lending, as the banks are largely out of the picture and are only seeking to invest in the best assets, at low loan to value ratios with excellent covenants on long leases.

We continue to see the UK market as going through a period of substantial change, driven by the changing requirements of occupiers and we have no reason to change our view.

All three of the traditional sectors have serious headwinds and threats.  We would point to the results of retailers as the best way to understand what is happening in the retail sector.  If we focus on Marks and Spencer and Next, both have issues.  Next, has recently announced poorer than expected sales, blaming warm weather in November and December.  More telling, was the revelation that online sales grew by only 2% as other retailers ‘caught-up’.  Whilst Next’s margins remain strong at c20%, competition may erode this.

M&S suffers from poorer margins and an offer which appears to have lost its way.  We wonder whether people will return?  From a property perspective, these changes are important.  Long taken as a town’s anchor store, pulling in other stores close by and defining the prime pitch of a town, these days are long gone.  The same is true for malls.

Rental growth is the long term driver of total returns together with collecting the current rent.  We don’t see nominal rents growing much over 2016 or the next few years but real growth may be relatively strong with inflation so low.  We contribute to the Investment Property Forum property forecasts and our forecast versus the market average is given below.  After 2017 we expect rents to flatten.

Keills Property Trust attempts to shield itself from uncertainties of rental growth through its investment in properties with fixed or index linked uplifts in rents.


As investors have bid prices up, yields have fallen (see Table 1 above) and like any asset, as yields fall, the risk of holding the asset increases.  Small yield movements have a much larger impact on values.  This effect works both ways (yields falling or rising) and could make property pricing more volatile.

Our approach is to focus on long term income sustainability and to buy at yields cheaper than the market as a whole.

Change of Trustee

As we write we are confident that the proposed change in Trustee from RBC to Vistra (UK) Limited will be effected. Documents are being circulated to put this change in place and we see no reason why the change should not be completed.

Debt repayment

As part of our continuing review of Keills Property Trust we assess how individual assets are financed from time to time.  Following the latest review, we repaid the outstanding debt owed to Santander for each property and therefore the fund has no debt currently.


Net income earned in the six months to September 2015 of £564,110 was distributed on 31st December 2015.  The majority of distributions are now taken in cash although the option to reinvest remains.

Other matters

After 6 years, Keills and Magarch have moved office.  Our new office is not far from our previous address and we are gradually hanging pictures and fitting it out.