Quarterly Investor Report

Economy & Strategy

Keills Property Trust | 30 June 2016

Quarterly Investor Report 30 June 2016

Economy & Strategy

We were wrong in believing that the EU Referendum result would be Remain.  Mark Carney, the Governor of the Bank of England, had previously warned that the Brexit vote was an important event globally and this was confirmed when Yellen, the Chair of the Fed decided not to go ahead with interest rate rises at the Feds meeting in June.  Following the vote, the direction of interest rates now looks downwards.


Source: Bank of England/Keills

The fallout from the EU Referendum is only at the beginning and already we have a leadership vacuum and the resulting uncertainty itself will reduce investment.  At this time, we simply do not know what will happen and we are writing this at a time when both the Governing party and the Opposition are seeking new leaders, albeit under different circumstances.  As we go to press, the chaotic politics of the UK has now unexpectedly produced a new Prime Minister and we will wait to see just how markets react.  Initially the removal of one unknown factor with the appointment of Theresa May, seems to have stabilised sterling but it is early days with many twists and turns to come.

Investment markets are more brutal in their assessment and bond markets have ‘run for cover’ pushing up prices and resulting in yields falling for 10 year gilts to less than 0.8%, an historic record.  On the other side of the Atlantic, the yield on 10 year US Treasuries has fallen below 1.5% and is pushing it’s all time low of 1.32%.

Over the last 3 months, the club of countries where bond yields are negative has expanded significantly.  German bunds are now negative at c-0.2% and Japan at c-0.27%.  In Switzerland, yields are now negative out to 50 years.  Welcome to the Negative Rates World.

There is developing discussion about the merits or otherwise of the Quantitative Easing policies adopted by many Central Banks and their effectiveness in boosting spending.  Some economists are beginning to advocate ‘helicopter money’ which would be effected by say three years of reduced taxation with the hope that taxpayers spend.

We suspect these extreme measures will be ineffective and with the level of indebtedness, we think people will pay down debts rather than spend.

Once again we repeat our stance that the period of time needed to deal with the debt problem is far longer than one or two electoral cycles.  Rather than it being something that Governments deal with in their own way, the requirement is actually for a 15 year plan with cross party support.  The bottom line is that you cannot solve a debt problem with more debt.

There is a positive consequence of the extremely low and negative yield interest rate environment.  We reiterate our simple message to all Governments; go out and replace all of your borrowing at these cheap levels.  In fact, borrow a bit more and use the extra to build infrastructure, creating jobs and tax receipts in the process.  Whilst debt levels may modestly increase, the cost to Governments, because of low interest rates need not be higher.  The QE experiment may be reaching endgame.

There are a number of implications of the Negative Rates World including:

  • In Zug, Switzerland, taxpayers are being asked not to pay their tax bills early;
  • Insurance companies who receive premiums have to invest these and achieve a return;
  • In Germany companies are being established to store bank notes rather than having them deposited at a bank
  • In Japan there has been a rush to buys safes.

There are consequences too for pension funds and once again we expect to see liabilities rising as the actuarial profession factors in changes to the risk free rate.

 UK Property


Our central assumption is that the UK will trigger Article 50 and leave the EU.  Euro facing banking and insurance operations may leave London.  This will lead to job losses and a reduction in demand for office space as Frankfurt and Paris vie with each other to woo these operations.  Much Euro trading is London based and this too may move offshore.  We expect the effect to be felt most in the City then the West End.  To quantify the change, we think market rents in the City might fall by 20% over the next 3 years.

UK manufacturing should benefit from the weaker pound and so manufacturing units may benefit from higher tenant demand which should drive rents.  We believe this effect will be most pronounced in the South.

 Capital Values

Our view is that over the long term, capital values generally follow rental values so for the City we could see values here falling.  For the warehouse and manufacturing sectors, rather than see values rising, we expect values not to fall as much.

 Gating of property funds

At present, we are witnessing various open ended property funds preventing investors from withdrawing their cash.  This was last experienced in c2008.  Other fund managers are making fund level price adjustments to reflect what they believe will be a reduction in values.  The problem funds are having is that the firms of surveyors who value the underlying real estate have not recorded any material transactional evidence to demonstrate falling values.  This is one of the difficulties of investing in real estate, where the valuation process is necessarily backward looking.

Rather than make an arbitrary price adjustment, we have decided to move the redemption notice period of Keills Property Trust from three months to six months.  Hopefully, there will be sufficient market evidence for our valuers to make any appropriate changes by that time and we will continue to keep this under review.


Keills Property Trust bought a car-park investment in Ipswich this quarter.  This will extend the average unexpired lease length in the fund.  The rent, paid by the car-park operator NCP, is contracted to increase by a minimum of 2% pa capped at 4% pa over the 35 year lease term.