Quarterly Investor Report 31 December 2019

A New Decade

We go to press mid-January 2020 with the 2010’s in the rear view mirror and the 2020’s moving into full view.  The last decade has been incredible in terms of investment.  Many of the long held benchmarks and beliefs common to investors’ thinking for decades have been swept away as markets struggled with the aftermath of the Great Financial Crisis.

First and foremost is the concept of a debt recession which global markets have managed to avoid since the 1920’s.  Secondly, the interconnectivity of the global economy has been visible for all to see and has been a fundamental feature on how the world dealt with the crisis.  The outcome is that we now live in a world of quantitative easing and negative nominal interest rates.  Textbooks will be rewritten.

This quarterly report is not the venue for recounting the history but it is important to contextualise.  Ten years out from the GFC, the world has much more debt than that which was in place to cause the GFC in the first place.  At the same time, the global economy is awash with money, pushing interest rates to record lows and forcing longer-term income seeking investors, further up the risk curve.  It is not obvious how this will end, other than painfully.

Many point to Japan as a key to the future.  Since the early 1990’s crash, when the Japanese the economy which was at the time vying to be the biggest in the world, the Japanese Government has struggled to inject some life into its economy.  Some 30 years hence, Japan is one of the most indebted countries on the planet and growth is pitiful.

World leaders and commentators are in Davos for the World Economic Forum bash.  This time the environmentalist, Greta Thunberg, is taking to the stage as environmental matters race up the agenda.  Let’s hope that a consensus can be agreed to stop global warming and give our children and their children some hope.

Elections

Later in the year we have the US election and the likely outcome there is also far from clear.

In the UK, despite the emphatic Conservative election victory, it is clear that Brexit will again start to appear in our national headlines.  The 80 seat majority that Boris Johnson won on 12th December will certainly mean that the UK leaves the EU on 31st January 2020.  What is unclear is the deal, if any, that will be reached before 31st December 2020.  The political background has shifted and already the Chancellor is talking about a much more distant relationship with Europe than that envisaged under May’s Government.  Time will tell, but it is impossible for business to plan for a world where few rules are in fact known.  As a result, most businesses will be forced to assume the World Trase Organisation rules, something they have been reluctant to do up until now.

 UK Property

If this is the economic background, then how does this impact on UK real estate?  Property ownership involves capital allocation and decision making.  Currently, investors have been cautious about investment and we have seen the high profile gating of investors’ funds to cope with withdrawal demands.  Now that we have a Government with a big majority, we believe that this will disappear over time.  With (at least) five years in office, Johnson, despite Brexit, should be able to offer some stability, which is exactly what investors like.  This stability, together with minimal growth, will begin to drive occupational decisions and so rents are expected to begin to increase marginally.

London is expected to be an immediate beneficiary of growth, particularly if Sterling is weak, thereby attracting overseas cash.  The longer term outlook for London, in a post Brexit environment, is of course unknown and this may hold back levels of investment.  There is a view however, that London’s strength is sufficient to overcome any European hiccups.

Outside of London the market is less likely to enjoy a “Boris bounce”, with the occupational market being much more in balance and overseas appetite being more subdued. Nevertheless, we still expect modest levels of office rental growth, as in London.

Property is still delivering strong income returns and this is expected to continue.  The retail sector is undergoing massive change as consumer preferences evolve and it will be interesting to see the outcome of the latest struggle to refinance Intu, the retail giant.  A few years ago as Capital and Regional, Intu was one of the better loved property stocks, but this is no more and with its hands tied  it is more akin to a “zombie” property company. The current debt repaying rights issue of £1billion looks well off the mark.

At this time of year, following the Christmas trading results and where performance has been poor, we typically witness a number of retailers hitting the wall.  This year is no different with Links of London and Mothercare disappearing swiftly followed most recently