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Two weeks since my last note and not much has changed on the political landscape, or in the betting markets, although Boris may alter that this week with scheduled visits to EU leaders. Indeed the only price that has changed is in my England to win the Ashes prediction, but keep the faith, England are now 5/2 from 5/6 two weeks ago.Read Full Article
So there we have it, as assumed in this note for the last two months, Boris Johnson is the new Prime Minister, but now the real work starts.
Can Johnson somehow convince the EU to change their Withdrawal Agreement to remove the controversial Irish Backstop? Or will he, on Halloween of all dates, take Britain out of the EU in a ‘No Deal’ scenario?
Betfair currently have it priced up at 6/4 to leave and 5/8 we don’t by the 31st October – whilst ‘No Deal’ is 7/4. Therefore, whilst Johnson continues to push the ‘No Deal’ rhetoric, realistically it’s still difficult. Personally, I don’t see how, unless there’s some massive change of heart on both sides of the benches, ‘No Deal’ passes through Westminster – proroguing or not.
So where does that leave us? It really is unchartered territory, but the message, particularly within the commercial property sector is to look long term. Look beyond Brexit.
The drop in the Pound should tempt overseas investors back in and US Private Equity will be looking to pick up any perceived favourable pricing, together with the currency play on offer, and so, this period between now and end Q1 2020 offers an opportunity.
Industrial and logistics, as well as South East offices, continue to be under-supplied, despite the recent uptick in speculative development in logistics, particularly. Occupiers still need new offices and warehouses therefore take-up has remained robust. Edge of urban, multi-let industrials will continue to be in vogue.
With development finance likely to become harder to come by as the Brexit uncertainty continues then anticipate pricing for 15 years plus income to come in, although covenant strength will play a part.
Brexit or No Brexit, Deal or No Deal, the fundamentals (outside of retail) remain strong and it is important to remember that. The only guarantee I’ll give is… England will win the Ashes and you can get that at 5/6. Thank me later.
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The more things change, the more they stay the same, so the saying goes, and with a new Prime Minister about to be appointed, the pound now worth $1.24, a low last seen in early 2017, it feels that three years after the Brexit vote, we very much are still in the same place.
Johnson should be confirmed as the UK’s third Prime Minister in three years next Tuesday (currently 1/50 with Betfair). But the ‘No Deal’ rhetoric from both Johnson, as well as rival Jeremy Hunt (37/1 to be next Tory leader) in their latest debate has already spooked investors and traders in The City.
The pound fell 0.9% on Tuesday to $1.2399, leaving Sterling the ‘proud’ holder of being the the worst performing major currency against the US dollar over the past one month, three months and 12 months.
In reality, a ‘No Deal’ Brexit still remains difficult for Johnson to pursue through Parliament and the futures markets and volatility index are predicting an equal chance of ‘No Brexit’ and General Election scenario, so essentially, everything remains on the table. Still.
Personally, I think we are heading for another extension of the Brexit deadline, as kicking the can down the road is definitely the easiest option right now. But equally if we do leave without a deal, whilst I don’t believe that it would be the best option, the Bank of England will step in and the monetary policy response will produce a much more benign outcome than perhaps people are expecting.
Brexit or not, 2019 commercial property investment volumes are down c.33% on the same period last year and it would take something phenomenal to see a reversal to the point where trading comes close to what we have witnessed in recent years.
In a ‘No Deal’ Brexit then the pound would be expected to fall to c.$1.15 and would make the UK look very compelling to any overseas investors.
Nevertheless, it would still be difficult to forsee Q4 being great, as valuations would almost certainly fall. Domestic investors would be unwilling/un-wise to crystallise those losses and overseas investors unable to repatriate any money they may have made, as trying to turn the pound into your domestic currency would not be prudent.
But as I say, I don’t actually expect that scenario to play out. The more things change, the more they stay the same.
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The logistics occupier market has so far struggled to hit the heights of 2018
and at the halfway stage, with just 11.3 million sq ft transacted, we don’t forsee
last year’s total being surpassed, particularly with Brexit looming in October.
However, it is by no means all doom and gloom…
It’s been a busy two weeks since our last DTRE – Politics and the Economy note. The obvious place to start is that Boris Johnson has confirmed his position as the favourite to be the next Prime Minister (best price ¼ at Betfair), knocking out all his rivals, aside from Jeremy Hunt.
But that’s not the real story and neither is it Boris’ colourful personal life. It is in fact that over the weekend, in Birmingham, both Johnson and Hunt demonstrated a complete lack of understanding on the terms of the Withdrawal Agreement when speaking to Tory members.
Just for clarity, the ‘Implementation Period’ that both Johnson and Hunt referred to is actually part of the terms of the Withdrawal Agreement. ‘No Deal’ = No Implementation period = WTO terms.
This complete lack of understanding has not gone unnoticed by business leaders. Or by their new cheerleader, Philip ‘Spreadsheet’ Hammond, who in all likelihood will be replaced as Chancellor by the next PM. Hammond was cheered to the rafters by bankers and brokers at his Mansion House speech on Thursday for saying he’ll “fight and fight again” to prevent ‘No Deal’.
For the first time, perhaps ever, the Tory leadership seems detached from the big money and big business in this country. ‘No Deal’ is bad for business. Business investment, GDP and GfK Consumer Confidence Index are all out this week (28th June) and I’ll be amazed if we see any substantial uptick, particularly after the BoE cut its growth forecast last week.
There is a groundswell of opinion that the only way out of Brexit is to leave with ‘No Deal’, at whatever cost that will have to the economy. It may only be at that point that people will realise quite how damaging that is. Although in reality, I still believe it’ll be near impossible for the next PM to get ‘No Deal’ through Parliament.
What does any of this mean to the commercial property market? For both leasing and investment then this Brexit-impasse obviously is not good, and it’ll take a phenomenal last six months for leasing or investment volumes to match those of last year.
The continued uncertainty will reinforce a two-tier market. I mentioned last time that the fundamentals for certain prime regional offices and well located urban industrial and ‘Big Box’ logistics remain favourable. Both types of assets will continue to attract buyers and pricing is showing no signs of softening. There’s a much larger macro-story at play, that is much bigger than Brexit and buyers will look beyond the next three to six months.
At the other end of the market, the job of the valuer will become increasingly difficult. A conflict is surely on the horizon between landlords who will be eager to see the value of their industrial hold firm whilst the rest of their portfolios (mainly retail) are marked down. But at the end of the day everything has a price and as Howard Marks, founder of Oaktree Capital, said in today’s FT, “Low price is the remedy for everything”…a medicine perhaps the UK will be swallowing come 1st November.
Anyway, the summer has arrived. The sun is shining, fingers crossed England are going to beat Australia in the cricket tomorrow and I’m off to Glastonbury. It’s not all bad.
Two weeks after our first ‘DTRE – Politics and the Economy’ note it seems not much has changed in the political landscape – except perhaps it’s now seemingly compulsory to have experimented with recreational drugs to be the next Prime Minister. What has this Brexit-malarkey reduced us to?
Johnson remains the strong favourite to be the next Conservative leader, at a very short price (5/8) and thus be the UK’s next Prime Minister, although interestingly the betting exchanges don’t believe there’ll be a General Election this year, with the next General Election being in 2020 or later the favourite at 2/5. Which I suppose from a property investment perspective is at least one less thing to add to the list for this year.
Prime Minister by end-July, Brexit in October, General Election in early 2020, seems to be the order of things.
In terms of Brexit, it’s hard to suggest what will happen without knowing who the PM is going to be. ‘No Deal’ remains the second option and least preferred by Parliament and The City but cannot be ruled out.
Essentially what the Brexit delay from March until late October really means is that the UK will spend the rest of this year treading water from an economic point of view.
UK GDP for April was released this morning and shows a contraction of 0.4% and follows a 0.1% contraction in March, although growth remained in positive territory at 0.3% over the Feb-Apr period.
I remain confident that once a Brexit deal is agreed then we should see economic growth pick up, but unfortunately the uncertainty created by Brexit means that growth this year and Q1 ‘20 will remain sluggish.
From a property perspective the Brexit impact has also been felt and trading volumes are down 22.5% on the same period of 2018.
One wider investment trend to look out for is potential corporate activity, with Helical the latest listed developer to be the subject of a takeover bid. The uncertainty created by Brexit and within the retail sector is very much being played out in the share prices of the UK’s listed developers.
It’s difficult to foresee that the share prices and NAVs of the REITs will do anything more than move sideways for the foreseeable future. Although moving sideways would be a positive for those REITs heavily exposed to retail. After A&J Mucklow recently agreed a sale to LondonMetric, the shopping centre REITs Intu, Hammerson and Land Securities, as well as now Helical, all now look particularly vulnerable.
From an industrial and logistics investment perspective then the market fundamentals remain relatively favourable but we are now seeing investors becoming more selective over opportunities, although that caution is not being uniformly applied across the industrial sphere and we are currently aware of four industrial estates under offer at 4.25% (NIY) or lower.
I mentioned in my last note that pricing for offices had come off and we don’t see any sign of that changing in the near term. Having said that certain South East and regional offices remain undersupplied, but it is about being selective. Birmingham has four years of supply and Newcastle has one, for example. There are still good returns to be made in refurbishing and repositioning assets to bring back to the market in late 2020, early 2021.
Maybe its today’s rain that has dampened my mood!
Bit of politics today…seems appropriate. Whilst I keep saying it’s a political crisis not an economic one, what happens at Westminster won’t happen in isolation from property. It won’t force a real estate crash – but could see further inactivity.
Regardless of the Brexit Party’s predicted triumph (they are 1/50 to win the most seats according to Betfair i.e. put on a £1 and you’ll get £1.02p back – it’s nailed on), the main story will be Theresa May’s departure.
The vultures had been circling…and it has now been confirmed. Theresa May will leave her post on June 7th.
Odds on next Prime Minister;
Johnson 8/5 (FAV)
It’s now certain there’ll be a General Election this year. Any new Tory leader will need it to confirm their Premiership. Question is when? October at 9/2 is the current front runner.
Then you are left with who wins – Corbyn? Or Johnson? Probability is that neither will win an outright majority. Johnson wins he’ll go back to Brussels, ask for them to remove the controversial ‘Backstop’ they’ll refuse, he’ll say fine ‘No Deal Brexit’, then Parliament will move against him to prevent that…how that chain will be broken is difficult to say.
Probably worth a completely separate email on the risks Corbyn poses, but with him unlikely to get an outright majority then his more radical proposals will almost certainly fail/need to be watered down. Also worth noting that a Labour government wouldn’t necessarily be a car crash for real estate, historically Labour governments have always invested in infrastructure and spent on public services. Looking across Europe at some very left-leaning cities, Berlin, Amsterdam and Barcelona, they are all performing very well from a real estate perspective.
Either way Betfair have it at 2/5 that we will not be leaving the EU on/before 31stOctober. 15/8 we do.
3 years near enough to the day, we’ll be 3 Prime Ministers down and no end in sight…
From a property perspective anything on a long lease to a strong covenant still sells, suggesting a flight to safety. Also, institutions are still in the market for multi-let industrial estates, as they try and re-balance their portfolios, and the occupier markets continue to perform.
In offices, whilst pricing has come off, we are still buying and selling both good quality buildings and offices that needs re-positioning and we are still letting space.
Good agents stay busy!
10 things you need to know about Big Box logistics in 2019.
1 Take-up hit 31m sq ft
2 35% above the 10-year average
3 The two biggest lettings were both to Amazon – 1.5m in Darlington and 2m sq ft in Durham
4 Brexit stockpiling has had limited effect on supply to date
5 8m sq ft currently under construction, still below the 2005-2008 UK averageRead Full Article