Surviving The Knocks

I recently spent some time in the company of Scott Corfe* and Mark Long**: Scott is a macroeconomist with a wonderfully balanced view of how the political agenda defines our economic reality and Mark is a property investment specialist who can read the property sector tea leaves and understand the implications for us.

The conversation inevitably turned to our forthcoming ‘Brexmas’ election and, despite the polls putting Boris well ahead of Corbyn, Scott ruefully reminded me that in 2017 the pollsters arrived at the same conclusions – and were proved wrong when Mrs May lost her (inherited) majority.

Reflecting on the possible outcome of the election, Scott doesn’t think that Boris will win the outright majority he wants but, neither does he think that Corbyn will. He suggested that the most likely result will probably be a minority Conservative government or a hung parliament Neither result will allay the commercial and economic uncertainties which are currently paralysing the nation.

Scott also felt that there is a strong possibility it could lead to a continued slowdown of the economy, perhaps even another election, another referendum and/or another ‘IndieRef’ in Scotland.  

We also talked about life in the face of a potential global economic winter, which could last for five years or more – a very real prospect in the light of the current trade wars involving the US, China, the EU and, let’s not forget post Brexit Britain. Election fuelled spending promises will inevitably lead to escalating government debt – which will compound the issue.

Our future looks gloomy when you see it through the eyes of an economist. But, being a property advisor of over 30 years standing (is it really that long?), I was heartened to hear Mark’s take on the implications for the property sector.

He reminded us that:

  • Despite the ‘gloomsters and doomsters’ prediction about a Brexit fuelled collapse of the financial services sector in the City – and therefore the office market in London, the latter is still in quite robust health (probably fuelled by a growing IT and media sector and the fact that London is and will remain the largest market for office and commercial property in Europe).

  • Despite endless column inches about the demise of retailing, out-of-town retail parks, with their easy access, free parking, choice of retailers and an underlying focus on the ‘buying experience’ ensures that they too are still in rude health. Consumers want to sit on a sofa or lie on a bed before they make a decision. They want to feel, touch and enjoy the experience of interacting with their new iPhone 11 before they buy the product.

  • Despite the explosion in e-tailing (grocery retail sales for example is anticipated to grow by 60% by 2023) a deeper analysis of the various retail segments reveals that food has a 95% market penetration, but the market share of on-line book retailing is only 40%. The irony is that retailers’ margins have been pared to the bone and home deliveries are an expensive service, which erodes them even further.  

  • Despite the challenges to property as an asset class (from equities, bonds and even alternatives such as art, wine, coins and memorabilia), UK property is still very attractive to inward and UK investors looking for:
    • A hedge against inflation
    • A well-regulated market
    • Political stability – some might challenge this, in the light of recent shenanigans at Westminster, but just consider countries such as most of mainland Europe and markets where (political) ‘popularism’ is challenging the very fabric of the country’s long-term macroeconomic management strategies and you will soon realise why we are still attractive to investors.

So, there you have it. It looks like the global economy is going to hell in a handcart with global trade falling, but the UK economy continues to remain resilient.

The UK property sector is stretched but, we are still an attractive medium and long term proposition to investors. Property has continued to enjoy an attractive yield premium over gilts and, an analysis of (property) investment performance over the last 19 years reveals that income have delivered 75% of property investment performance, 25% coming from capital growth, although we know that property cycles and an entrepreneurial approach can change that equation.

Reason to be cheerful? Well, whilst that might be stretching it a bit (if you consider the fate of the UK resi market), if you take a holistic, long term view then yes, there is reason to be cheerful. 

*Scott Corfe, Research Director, Social Market Foundation

**Mark Long, Head of Strategy, Orchard Street

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James Routledge
James Routledge 11 November 2019

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