Whether 2016 marks the beginning of a new ice age or merely an adults-only swim session, one thing is clear, London’s recent success comes at a price.
Forecasters looking to avoid the scrap for attention that marks January’s first week will not have found its second any less crowded. But with a common message, which straddles all major investible markets, it is one that is hard to ignore.
Private equity firm KKR’s head of global macro and asset allocation warns that the current volatility in global markets could destroy less experienced investors. “We think that the mantra ‘adult swim only’ seems to be a prescient catchphrase for the current macro investing environment,” says Henry McVey. “In layman’s terms, today’s market conditions are somewhat akin to swimming at the beach when there is a strong undertow that could pull a less experienced swimmer out to sea.”
Meanwhile, Albert Edwards, Société Générale’s perma-bear global strategist, is advancing an ice-age thesis. “Everything seems to be coinciding at the moment,” he argues, bleakly.
From macro, to micro, the warnings continue.
For INREV, the UK has fallen behind Germany and France as the target for institutional money. This is backed up by the Urban Land Institute and PwC’s influential Emerging Trends in Real Estate report, which finds that London has tumbled out of favour with investors. The city has dropped out of the top 10 in a list of European cities with the best real estate investment prospects.
At the heart of each of the warnings is the same concern: value.
Edwards sees a 75% correction in US equity prices: stocks are overvalued. The investors INREV polled are eying opportunities that offer greater risks and potential returns.
The absence of London in the ULI rankings reflects the wider theme of the report, which finds investors are seeking value in alternative sectors and with more appetite for development.
None of this means there is not interest, opportunity or activity. It just means it will shift. For KKR, that could be a shift from equities to infrastructure and real estate. “Within real assets, the current environment favours investments that can provide yield and growth versus owning outright commodity positions,” says McVey.
And while ULI respondents see Berlin as the most attractive European city for investors this year, thanks to its creative, technology and cultural strengths, they also like the look of Birmingham – the only UK city to retain a place in the top 10.
So, as London pays the price of success, other UK cities will benefit. But with the capital’s mesmerising credentials unaltered, don’t write it off just yet.
• Last week I confidently predicted a wave of M&A. In hindsight, I should have expanded that. Could it be a year for divestment too? A week ago I would perhaps have said no: the urge to merge appeared irresistible. A week on, I’m not so sure.
Bilfinger has been approached by unnamed bidders for its property divisions. It has appointed advisers to review options which could lead to the demerger of its Bilfinger Real Estate and Bilfinger GVA, among other operations. Meanwhile, Countrywide, the UK’s biggest property group and parent of Lambert Smith Hampton, has been running the rule over Deloitte Real Estate.
That may be a deal that won’t happen, but it will encourage others to take a look at themselves and at others.
So is 2016 the year of M&A? A MAD year more like – one rife with mergers, acquisitions and disposals.
• This year’s other sure thing is a spike in litigation over development work as activity picks up, according to Guy Fetherstonhaugh QC. Landlord and tenant clashes will continue to keep the courts occupied, leasehold enfranchisement will be tested and the very definition of what is a house will be under scrutiny. As Fetherstonhaugh says, it will an interesting year – in so many ways.
