Quarterly Investor Report 31 December 2020

First of all apologies for Q3.  The observant among you will have spotted that you did not receive a Quarterly Investors Report at 30 September 2020.  But we’re back again and will just pause and reflect on 2020 as a year and then tiptoe forward and peer into 2021.

Review of 2020 the Year of the Pandemic

2020 began innocuously, with markets stable and nothing much afoot.  Bond yields were on a gradual rising trend, with the expectation that economic growth was finally returning and interest rates might also need to rise to combat modest inflationary pressures. Quantitative Easing had effectively ended and Governments were cautiously optimistic.

In the USA the first term of the Trump administration would end with the 2020 Election and polls were expecting Trump to win.  In the UK, Johnson had just won the December 2019 General Election with an 80 seat majority and a promise of “getting Brexit done”.

Europe was quiet election wise and the focus there would also be on getting Brexit done.

And then came Covid-19.  By the end of March we are all frightened and in the first lockdown.  We learnt about ‘r’ numbers and asymptomatic infection.  We learnt about social distancing and wearing masks.  We tuned into daily Corona-virus updates from our political leaders.  We found out about SAGE, that we had a Chief Medical Officer and a Chief Scientific Officer.  Our universities had professors of mathematical pandemic modelling.  We were taught how to wash our hands properly.  We learnt what PPE was.  A Scotch-Egg was a substantial meal.  Furlough was a real word.  You could test your eyesight by going for a drive.

Schools were closed.  Non-essential shops closed.  Offices were closed.  Cinemas closed. Pubs closed.  We had to protect our NHS.  Except for Thursday evenings at 8pm, the streets were empty.  Orderly queues formed in our supermarkets.  The prices of hand sanitizer rocketed.  The price of masks soared.  PPE went through the roof.

We were directed to work from home if at all possible and we did so, tuning into Netflix whose shares also soared.  With all the shops closed Amazon was a huge beneficiary and forced many more shoppers online.

By the summer, the daily infections were falling and slowly Governments loosened restrictions.  But the virus hadn’t died and quite soon a second lockdown was underway (not as severe as the first) in October.  The idea seemed to be to avoid having to cancel Christmas.  In the end, Christmas was cancelled, with very limited travelling and households were told to stay safe inside.

We are now in January 2021 and in our third lockdown, this time as severe as the first. The virus is still winning, but we now have two vaccines being distributed in the UK, so at least we have hope.  The thing is, it will take time to manufacture, distribute and inoculate the vulnerable, so don’t expect a return to “normality” for 6 to 9 months.  Even when it does return, we are not sure exactly what the new normal will look like.

To pay for the costs of the pandemic; wages, PPE, vaccines etc., Governments globally have had to dig deep.  Very deep.  The Great Financial Crisis of 2008/2010 gave birth to QE and this has again been used to help us through the pandemic.  Bailing out RBS cost the country c£45.5 billion. The Chancellor has borrowed £400 billion to pay for Covid-19 (so far). Ouch!

The scale is truly unprecedented and reflects what happens when the whole economy stops.  As mentioned above, some businesses have been winners, generally those online, whilst any business which involves people coming together has been hit badly.

The UK bumbled through its Covid-19 messaging and often politicians seemed to be behind the curve with a late struggle to catch up.  In the USA, the picture was far worse, with Trump initially seeming to be in denial.  The (now) 370,000 Covid-19 deaths in the USA were no doubt a strong reason that Trump lost the election.  Biden’s win was probably a win for the UK too as Boris was beginning to look like “no-friends Johnson”.  He did complete a Brexit trade deal with the EU, but the impact of that deal has not yet hit us.

Property Market

With the economy shut, the property market has suffered too.  Offices have been empty and the super large regional malls have been like ghosts, with a few essential shops open interspersed with a lot of closed units.  Sheds have benefitted from the big increase in online shopping so, as a whole, have done well and for investors have been a proxy for online. Supermarkets which have been providing an essential service have done well too.  However, the costs of Covid adaptation in the larger supermarkets have been high and whilst turnover has increased, these costs have diluted profits.

Services dominate the economy in the UK and mostly work here is done in offices.  When the first lockdown occurred people were asked to work from home where possible and many found that technology allowed an efficient WFH environment.  Today, we are in the third lockdown and many office workers have not been into their offices since March last year.  Yet work has continued and the big office users like banks etc. are in robust health.

Professional service firms (accountants, lawyers etc.) have been re-appraising their space requirements and we expect the net result, post pandemic, will be a need for less space. Moreover, the requirement will change to more flexible space, with more meeting rooms and shared facilities.  Some businesses will simply review their space requirements and decide that a virtual office is more than sufficient.  Keills itself has taken this route and we now have the same access to information and systems that we have always had but individually, we are saving on commuting and are able to offer a flexible working environment to our team.  We expect many more businesses will adopt similar strategies.

So what of the City Centre office?  Firstly, the requirement for such space will not go away.  We know that younger employees, those under the age of 35, cannot wait to return to the office.  This demographic meet for drinks after work, use restaurants more than families and are a key group to get the economy moving again.  So when we are encouraged to move away from working from home, we expect the uplift in the economy will be marked.  Yes requirements will adapt, but the social animal in us will pull through and in many cases we don’t expect to see much change.

We have said before (and are still standing by it) that often when a one off crisis hits a market, there is little transactional activity until someone has to transact.  It is only then that the market is truly tested in terms of market rents and yields.  Because of the inability of banks to foreclose (commercially it would make little sense) at the current time, we expect the time when owners are forced to sell is some time away and therefore we are currently in a slightly false market, to everyone’s advantage.

 

A peer into 2021

To state the obvious a lot will depend on how quickly the vaccines are rolled out.  We think it will be 6 to 9 months before normality is reached and that there may indeed be Lockdown 4.

Positively, many businesses are now able to effectively work from home on a permanent basis which has positives and negatives.  Those people able to do so, can probably adjust their work life balance, reduce downtime and avoid the cost and stress of long commutes.  Perhaps we will see a cultural clash between the younger workforce, hungry for social interaction and the middle aged who are happier at home.  A major issue for corporates to deal with, especially when faced with long and expensive City lease commitments.