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Q2 Market Overview

8 July 2019

SUMMARY 

Property returns continue to look strong when comparing to bonds and equities and with selective asset selection into sectors offering growth and stability this will provide our investors the right risk-adjusted returns. The structural changes in the retail and the industrial sectors accommodating online consumer habits, provide further opportunities when seeking to capitalise on the lack of high-quality leasing space and availability of institutional grade investment stock.

Diversifying into the Alternatives sector and specifically accommodation for older persons in care and retirement, gives access to a growing market benefitting from the demographic changes, whilst offering a counter cyclical investment strategy. The demand and /supply imbalance is only forecasted to increase and Barwood Capital’s entry into this sector has positioned our investors to capitalise on this opportunity.

UK ECONOMY

The EU departure date has been pushed back to 31st October and the Conservative leadership race is down to two, with the prospect of Prime Minister Hunt or Johnson becoming a reality with handover of the premiership due on the 23rd July. Until then, it will remain unclear what exactly the immediate future holds. This current political uncertainty results in it being even more problematic to predict short term outcomes with continued delays on decision making likely.

Despite the continued uncertainty the economy started 2019 well, UK GDP growth rebounded strongly to 0.5% in Q1 2019 from 0.2% in Q4 2018, a much stronger figure than might have been expected ahead of what might have been a hard Brexit. However, the latest Markit/CIPS results out in June are less positive showing the UK Manufacturing Sector contracted in May, the first time it has done so since June 2016. Manufacturers reported increased difficulties securing new contracts, reflecting already high levels of inventories following stockpiling activity in the run-up to the original Brexit date. New order inflows reduced from both domestic and overseas sources and the trend in production was the weakest during the past 34 months.

Consumers have been significantly less affected in their spending decisions than businesses by uncertainties over the economy and Brexit. Consumer spending benefited from robust employment growth and a strong pick-up in real earnings growth in the second half of 2018 and early 2019, but the outlook is now weaker. The EY ITEM Club forecast household spending to slow, cutting its estimated 2019 growth to 1.3% in the broader UK economy.

Retailers continue to struggle with rising labour costs, business property taxes and growing online competition with Debenhams, Boots and Marks & Spencer all announcing store closures, while Philip Green’s Topshop-to-Dorothy Perkins fashion empire staved off a collapse into administration last month.

Financial indicators show that global economic performance is having as strong an underlying impact as short term UK uncertainty, although clearly Brexit continues to weigh heavily on the prospects for the economy and UK assets.

UK PROPERTY MARKET

Overseas investors remained net buyers of the UK Market in Q1, with another £3.1bn of investments and £2.7bn of sales despite the political anxieties. UK property will remain a destination for global capital attracted by a devalued sterling, market transparency, relative liquidity, and low interest rates. Overseas investors have now totted up £123bn of net investment over the last 13 years, with more than £10bn in each of the last six calendar years.

The underlying UK demographics are fundamentally strong with a growing population and record employment, and moreover the UK property yield remains attractive relative to bonds from a risk premium perspective.

Although, the real estate total return in the 12 months to Q1 2019 was below both bonds and equities, it has outperformed one or other on a 3-year and 10-year basis and both on a 5-year horizon.

Source: MSCI, Bank of England

SECTOR SELECTION IS CRUCIAL

The consensus is that Industrial will continue to outperform all other commercial sectors and overall returns from commercial property mask significant sector variances, most notably with most retail suffering from long term structural changes due to the evolution of consumer habits in the digital age.
Source: MSCI

Investor appetite for increased exposure to the Alternatives sector is a continued trend as the sector continues to grow. Total deal volumes in the UK reached a new high of £16.3bn in 2018 up from £12.3bn and £15.7bn in 2016 and 2017 respectively. A particular focus will be within the care/retirement (Healthcare) sector providing exposure to structural and demographic changes. There is a lack of suitable product and it is one of the few assets that can offer long term income which is counter cyclical.

Source: JLL

 

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