Don’t frighten the horses

Commercial property rarely makes for mainstream headline news and we’re thankful lfor that as we quietly get on minding our own and our clients’ business. We occasionally stick our head above the parapets at either end of the year with the annual round of reviews and forecasts but that’s about it.

At the outset of this year, commercial property professionals and pundits were in broad agreement that yields had most definitely peaked and that the volume of transactions we’d been enjoying were unsustainable and that total returns were set to fall – my own firm pegged the fall to 8.8 per cent. So far so predictable in Q1 and Q2 2016 then.

However, before the third quarter of the year had properly got underway, commercial property came crashing in to mainstream media headlines for five days in a row and not in a good way. I say ‘commercial property’ but what actually made the news was the suspension and closure of a number of funds which were invested in commercial property.

It was the funds that were falling down, commercial property is still standing. Alongside other property interests, thankfully. Expert property commentators and analysts were - and still are - at pains to point out that a commercial property fund is an investment vehicle and one not for the faint-hearted either. In the close world of any niche investment funds, it is easy for contagion and a herd mentaility to take hold.

Investors in all sorts of funds are getting spooked and some of those whose portfolios include commercial property funds are wanting to liquidise their investments and move on to other funds and other asset classes. Commercial property investment fund managers were left with little option but to suspend the funds while they sell the asset. It can take a long time to sell an office block, business park or a retail outlet, believe me.

The thought of Brexit has, understandably, made many people twitchy – just look at the pre-poll rock solid political careers it has ended but now some new careers have begun too. While the matter of the prime ministerial succession and the timescale has been settled earlier than first assumed, the financial markets reacted to uncertainty.

In those first weeks post-24 June along with the value of sterling falling, FTSE companies most exposed to UK business interests saw their share price drop more than those with more international exposure. There was much mention of housebuilders’ shares falling as if this was proof of a mass property Brexodus.

To make a connection between the closing of commercial property investment funds and a potential housing market crash á la 2009 is crass but some reporters whose business is not, ordinarily, the reporting of business can be forgiven in not appreciating the very clear distinction between commercial property and residential property.

Investors in the housing market in the UK are, in the main, those who live in their investment. The forces driving commercial property investment funds are very different from those governing the housing market, namely a fundamental shortage and a low interest rate environment in the case of the latter.

The economic and financial expert view is that whereas the credit crunch of 2008 and 2009 was a financial crisis with political ramifications, what we are experiencing now is quite the reverse.

Setting aside on what the actress Mrs Patrick Campbell was commenting when she said it, I am minded to agree with her when it comes to the present situation: “My dear, I don't care what they do, so long as they don't do it in the street and frighten the horses.”

Will Mooney MRICS
Partner
Commercial, Cambridge

Negative split times

Will Mooney, Carter Jonas partner and head of commercial and professional services in the eastern region, feels the economic recovery is now a marathon not a sprint.

No athlete myself, I am, however, familiar with runners’ focus – which can border on obsession – on their negative split times. My familiarity extends no further than knowing that, in essence, this means finishing a run faster than you started while acknowledging that there might be a sag in the middle.

Look at coverage of and comment on the Bank of England’s latest Inflation Report and it could be concluded that the UK is in that sag. We definitely started this post-recession recovery slowly and we gathered pace in the past 18 months. While we know we’ll get there in the end, the doom and gloom first glance coverage of the prospect of deflation is enough to bring the Eeyore out in any of us whose natural disposition doesn’t tend toward the Tigger at the best of times.

But the prospect of a fall in UK interest rates to the point of a negative rate was laid out in conditional terms by Governor Carney. Interest rates might fall but could rise and banking sector activity would suggest a tendency to expect the latter. Last year, we bemoaned the prospect of the rise of interest rates and many people adjusted their borrowing and spending accordingly merely in anticipation of something that has yet to happen or might not happen for a good while yet.

Financial markets don’t deal in something called futures for nothing.

The current weakness of the price of commodities such as food, oil and energy - as cited by the Bank of England – shouldn’t really be mistaken for debilitating deflation. What goes up must come down and vice versa.

Thinking of the pound in our pockets, may be deflation is not so bad for commodities in the way it is for consumer durables of which the ‘big television’ is used as shorthand. We might put off buying the new big telly but we only bought our old big telly back in the days of easy credit when consumer durables weren’t treated as durable because they were so easily replaced.

But look where that got us?

Day to day consideration of the wider UK economy can be troublesome for those whose business, professional and personal interests are rooted in this region which is so dominated by the success of Cambridge. The latest Centre for Cities report once again confirms the economic pre-eminence of Cambridge among the top ranking cities of the UK. The city scores top marks in the ranking of cities across a range of measures including the lowest number of claimants for Job Seeker’s Allowance (JSA), the highest skilled workers, the most number of patents granted per 100,000 population and the highest house price growth.

It has become normal for Cambridge to occupy these top slots in the Centre for Cities annual rankings but it’s important that this normality shouldn’t be mistaken for complacency. Those of us privileged to live, work and thrive here are acutely aware of the national and international context in which Cambridge succeeds.

There’s talk of economic normality on the horizon for the UK from some commentators but it can be a struggle to recall what that is – if we ever had it in the first place.

Before the next Bank of England inflation report, there will be a General Election and politics and democracy have a habit of interrupting economic programmes.But what do I know? It’s all Greek to me.

Will Mooney MRICS
Partner
Commercial, Cambridge

Potential threats to farmers as the British Economy strenghtens

As the British economy strengthens this may pose threats to farmers because it is likely the pound will strengthen and interest rates will rise.

The strengthening pound is a particular threat for two reasons; first because it will impact on the value of European support payments which are defined in Euros and converted to pounds before being paid to farmers and second because it will make exports less competitive and imports comparatively cheaper.

The exchange rate in particular has been identified in recent years as one of the most important factors influencing the profitability or otherwise of British farmers and for livestock farmers in particular the receipt of European support can often make the difference between profit and loss.

These livestock farmers are also potentially vulnerable to the impact of increased imports which have been implicated in the recent slump in beef prices as beef is being imported from destinations such as Ireland and Poland. As a result the value of beef cattle in this country have fallen by approaching 25% in the last 6 months or so which is posing a serious threat to many livestock farmers.

This has lead to criticism being directed at farming leaders where many farmers feel the National Farmers Union (NFU) has not been doing enough to “beat the drum” for British beef producers. But the NFU has explained it has been encouraging the public to buy British beef and to back the “Red Tractor” logo.

The Red Tractor logo was introduced in 2000 in the wake of the BSE crisis to give the public confidence in British produce. The Red Tractor is a food assurance scheme which covers production standards developed by experts on safety, hygiene, animal welfare and the environment amongst other things. The Red Tractor logo means the food or drink has met these responsible production standards and is fully traceable back to independently inspected farms in the UK.

The NFU are also highlighting where supermarkets have not made enough effort to differentiate between British and Irish beef. But, the Chairman of the NFU Livestock Committee has admitted it has been incredibly difficult to gain traction on this due to the combination of an over-supplied market and soft demand for beef in this country which is giving the retailers the chance to ‘drive down’ farmgate prices.

However, NFU President Mr Meurig Raymond said that, “Confidence, particularly among beef finishers, is at rock bottom. This is a crisis. It is our top priority,” He added that, “Next Tuesday’s beef summit, hosted by Farming Minister George Eustice, would be an opportunity to reinforce these messages and encourage DEFRA to promote beef exports.”

So it appears a lot is hoped of this high level meeting next week but it remains to be seen what effect political influence will have on market forces and the often obscure world of the meat industry from the predominantly Irish owned abattoirs to the supermarket dominated retail sector.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk