Quarterly Investor Report 30 June 2019


Economy and Strategy


We are midway through 2019 and into another chapter of the UK’s Brexit saga.  Currently, given the UK’s prime minister resignation and imminent departure, the Conservative Party is going through the process of electing a party leader and new prime minister.  The process is expected to end around 24th of July.  The parliamentary party has whittled the candidates down to Jeremy Hunt and Boris Johnson and the Conservative membership gets the final vote.  Both candidates are committed Brexiteers with both on record as saying they would leave with ‘no deal’.

The main opposition, in the form of the Labour Party, has now announced that it wishes to remain within the European Union and that in the event of a second referendum, which it also has now called for, would campaign to remain.  It would appear that we are indeed heading for a ‘hard Brexit’ this time on 31st October, ironically Halloween.  If there was one simple message for UK business, not given by the Government, it is to prepare for a hard Brexit.

It is hardly surprising that business is turned off by the uncertainties that flow from this mess.  At the same time, trade tensions between the USA and China continue with no obvious conclusion.  This has caused US Treasury yields to fall markedly over the last couple of months and the same thing has happened globally, with German 10 year bunds being sold at a record negative interest rate last month.  In fact, the total of negative yielding debt has now reached over $13Trillion, a record.  In the UK itself, the economy has been slowing slightly and inflation has turned out to be weaker than expected.  

As investors seek returns in this environment the price of gold also has shot up, reflecting a shift to haven assets and also the fact that as bonds turn negative, the cost of owning gold falls.

We have written before that we live in interesting times and this truism continues.  We certainly did not foresee that the Great Financial Crisis triggered in 2008, or that it would still be gnawing at economies 11 years later.  What is clear is that the lack of serious growth has very much restricted the economic tools is available for politicians to use to remedy the situation.  Furthermore, if a remedy was found, the resulting increase in interest rates would kill the finances of many heavily indebted individuals, businesses and Governments.  (The elephant in the room).  We suspect therefore that the ‘interesting times’ will be here for a good bit more, possibly another 10 years.

Some numbers


UK 10 year gilt yield

US 10 year treasury yield

UK Monthly Index property yield

Property rental growth

Jan 2019





June 2019





 Source: MSCI, FT

 Government debt yields have fallen over the last six months as explained above.  Property yields have actually increased modestly, reflecting investment sentiment that property is more aligned to the real economy.  Certainly, at the All Property level, rental growth rates have fallen over the last 6 months and now stand at 0.3%p.a.  We see little pressure on rents to increase at all.

 UK Property

Looking at the press you cannot have missed the continued use of Company Voluntary Arrangements (CVA), particularly in the retail sector, where many retailers have now taken the step of threatening insolvency to their landlords in return for sharply reduced rental payments.  In both the High Street and in large shopping centres, landlords are under severe pressure.  As tenants collapse, leaving gaps in the tenant offering so shoppers’ appetite wilts, adding further to the downward spiral.  We support the call that there needs to be a change in how local rates are charged; as a High Street and shopping centre is at a big disadvantage relative to a purely online trader, which doesn’t have this burden.  A reduction in local rates would create other financial problems for local authorities through lost revenue and so a more imaginative solution to level the playing field needs to be found.

The demise of the retail sector is not evenly spread geographically.  A recent tour of some, albeit well off, south east market towns, witnessed very few letting boards and probably reflects the stronger economy in the South.

 Deals and outlook

We are currently seeing good deal flow for our preferred strategy of investing in RPI property deals let to quality tenants on long leases.  In many cases, the yields on offer are in line with the MSCI market initial yield but in addition, we are commanding a minimum uplift by way of our lease contract and so this extra income is ’free’.

 Fund redemptions

We were interested to read about the Woodford funds debacle.  It took us back to the European Union referendum vote when the day after, a number of property funds applied arbitrary haircuts to bid prices.  This despite London property, in particular, being immediately 15% cheaper overnight to overseas investors due to Sterling’s weakness.  The Woodford saga was more to do with the amount of unlisted investments breaching a manager and regulator imposed limit after Woodford Investment Management was forced to sell liquid assets to meet redemptions.

As property investors, we are very aware of the illiquidity of the underlying asset and at the referendum, we moved our redemption period from 3 months to 6.  As an investment manager of a fund holding any asset type, your principal aim is to enable investors to have access to the market of the underlying asset.  If market turbulence means that it takes longer to sell that potential asset, then so be it.  The route in and out should seek to mirror what is happening in the market.  While we have returned to a 3 month redemption notice period, this does not detract from our words of caution regarding underlying liquidity.  We also continue to point out that liquidity is a function of price.