The hysteria seems to have passed. Those commentators who predicted the end was nigh post-Brexit simply got it wrong. The market rapidly disabused them of the notion that forced sales would bring about the downfall of the commercial property markets as even allegedly distressed sales from the open-ended retail funds were concluded at close to (or even above) book value.
Valuers are now starting to move on from qualified valuations as transparency returns to the investment markets. We are all feeling a lot better about life as we start to recognise that we are experiencing some transitioning after five fantastic years for property.
Letting activity over the summer was robust outside London – and quieter within the capital – but that’s not surprising and competition remains fierce for better stock investment. Of course, rents may have come back a few pounds and yields for poorer-quality property may have moved out, but markets have enjoyed an extraordinary period – and is it not entirely normal to give a little bit back at the end of a regular cycle?
The Treaty of Lisbon took almost 10 years to negotiate and Brexit may take even longer, but therein lies the opportunity to adapt slowly to a new world and help form it. The notion that uncertainty may damage our markets is fair but markets always have to climb a wall of worry.
I fear far more for what happens if Donald Trump enters the White House than I do the challenges of Brexit. The implications for the equity and bond markets are a little scary. With that possibility, among many other global threats, both economic and social, how do we build an investment strategy fit for the next few years of zero or negative interest rates?
Property investors have a conundrum on their hands as to what to do next. The vast majority of good-quality stock is ex-growth, with little sign of when growth will resume, but is at least supported by low interest rates.
Secondary property has further to fall, but again this is just the usual cycle playing out. What is fascinating is how the search for income has become even more acute in the post-Brexit era. Over the past year, 20-year gilt yields have halved from 2.4% to 1.2%. Given that well-let property is a bond proxy, it now feels way too cheap on a comparative basis.
My colleagues and I created a long-term income business, Secure Income REIT, to take advantage of this low-interest environment, with the longest leases in the quoted sector.
The company’s portfolio, with some £1.6bn of assets, following its latest acquisition of 55 Travelodge hotels (all let for a weighted average 24 years to outstanding tenants with annual fixed or RPI upward-only reviews), generates a 4.5% dividend, growing at an estimated 6.5% pa compound rate for the foreseeable future. (Incidentally, on very conservative metrics that provides an 11% pa total shareholder return – nine times the return on long-dated gilts held to redemption.)
Apologies if this all sounds like an advert for the business, but I use this as an example to demonstrate the huge and unmerited risk-adjusted premium attached to real estate today compared with bonds. The disparity in valuation between a predictable, growing, inflation-protected property income stream and long bonds has to correct. Either bonds are too expensive or property yields too high.
As is usually the case at this point of a conventional property investment cycle, many of the short-term expiries and break clauses of yesterday, which then represented value creation opportunities, have become the liability of today, both in terms of investment value and fundability. For the foreseeable future, the attraction of risk-averse, longer-term income streams reflects a market where boring is the new beautiful.
Nick Leslau is chairman at Prestbury Investments
