Quarterly Investor Report 30 June 2020

Economy and Strategy

The economy is still in a state of paralysis following months of Covid-19 shutdown and the future remains uncertain.  Mainstream commentators have sought to predict the shape of the recovery; V, L, or U shaped, a Nike swoosh or flat lining.  In truth, no-one knows.  We are slowly working our way through a pandemic with every country tackling it in their own way, from denial in Brazil to total clean up in New Zealand.

Most of Europe now appears to have the number of new cases of Covid-19 under control and is talking about opening up air-routes for the holiday season.  In the USA, New York was initially hit hard and as a result, the local government introduced tough social distancing measures which, after a time, slowed the virus down.  The sunshine states of California, Texas and Florida are now suffering with record high daily infection numbers and a feeling there that the virus has gone rouge.

During the banking crisis, now over twelve years ago, Governments worked together to stop contagion.  Quantitative Easing was born to fix that problem and to a large extent, it worked.  This current crisis however wasn’t initially about money, but about the lives of the woman or man in the street.  Government has had to act in ways very different from their political orthodoxy.  Indeed, it is hard to imagine a Conservative Government in the UK offering up quite so much state aid to the extent that when this is all over, borrowing will be at its highest ever peacetime level relative to the size of the economy i.e. Gross Domestic Product.

Conventional economics is about supply and demand.  With Governments needing huge sums to pay for the pandemic, you would expect that they would have had to increase interest rates to make this debt attractive to investors.  However, through the magic of QE, Central Banks have been able to buy this debt and in reality, despite the enormous volumes of debt, interest rates are close to record lows.  This applies not only in the UK or US, but is also the case for most global economies.  Just as the notion that Modern Monetary Theory (or as sceptics say the Magic Money Tree) is beginning to take hold in conventional economics, we wonder whether now may be the time for some kind of global debt forgiveness?

Should we wipe the slate clean?

UK Property Market

Peering into the UK property market is equally tricky, with a spread of winners and losers.

City Centres have generally been in the losing camp as following Government direction, folk have stayed clear.  Drilling down further, buildings whose use depends on people coming together to socialise (think pubs, restaurants, cinemas) have all suffered and their future is at best, uncertain.  Many City Centre pubs, which have loyally served office workers, cannot return to profitability without the office workers returning to their offices or, a dramatic change in how we use these pubs and the level of rent and rates bills they incur.  Many of these businesses will not be viable if social distancing rules extend indefinitely.  Customers may have to accept that a trip to their popular local will be a much quieter experience, while landlords may have to accept that rents will fall.

High Streets will be much quieter and entry to shops is likely to be controlled to comply with social distancing.  We can expect queues and while this might be ok in the summer in London, standing about in a gale in Scotland, while waiting to do some discretionary spending, is another matter entirely.  Not all shops are equal however and the convenience store is alive and well.

Shopping Centres might be expected to provide some protection from the worst of the elements but here you will have to queue twice, once to get into the centre itself and then again to get into an individual unit.  We can’t help but think that this takes the fun out of discretionary spending.

Offices are going through the process of determining what they need to do to comply with the new rules.  Large offices will have a head start and may be able to bring staff in on a rotational basis.  Smaller businesses have less obvious flexibility and if they have successfully worked in a remote fashion, we can expect this to continue.

All is not gloomy. With the ‘forced’ work from home mantra, many small business have improved their IT systems and processes.  To enable this, businesses at the forefront of offering remote services, have benefitted hugely.  Microsoft announced during lockdown that they are heading towards where the expected to be in 10 years’ time, in a matter of two months. Microsoft provide cloud services for data storage and applications.

Web based retail (eg Amazon, Ebay and a whole host of others) has gained market share at the expense of the High Street.  This has produced significant sales growth in Amazon and in the delivery companies that support these outlets.

Businesses which help with the supply chain are booming.  Segro (formally Slough Estates) is now by far the largest REIT by market capitalisation in the UK.  It is over double its nearest rival and although this has been the case since long before the pandemic struck, we see no reason for any change.  Long live the unfashionable shed, to the extent that sheds are now hip.

Where are my rents?

A key policy of the Government at an early stage of Covid-19 was to stop landlords evicting tenants of all sizes and types.  The law for this is temporary and lasts until 30th September 2020, although we expect some kind of rollover.

Currently, if a tenant does not pay rent, you cannot evict them, no matter the strength of their business.  With this in mind, we have been keen to see where and which tenants have elected not to pay.  For Keills Property Trust, we only have one tenant who is in arrears (NCP Car Parks) and we are in discussion with them about a longer lease in return for a short term rent free period.  We also suspect that when we return to normal, the benefits of an open air car park will appeal more to users.

Our strategic overlay of wishing to own assets which are the natural home of the tenant seems to be paying off.

 Suspension of dealing in Keills Property Trust

We have reviewed our procedures for dealing units in the Trust in the current climate and following guideline set out by the Financial Conduct Authority and the Association of Real Estate Funds, dealing in units in Keills Property Trust has been suspended for a minimum of 6 months to September 2020.  At this stage we are not able to determine when trading in units in the Trust will fully reopen and we will keep all unitholders advised of any change.

Despite the suspension of trading in units, the Trust was able to continue with its 6 monthly distribution of income to unit holders, with a total of £755,000 being distributed on 30 June 2020.