James Routledge, Head of Investment at PAI member Matthews & Goodman considers the UK’s post-pandemic future:
Many people I’ve been speaking to recently are considering the prospect of a golden spring as we cautiously step out of lockdown and return back to ‘normal’ – whatever normal is.
For me, any uncertainty I might have felt following the Chancellor’s recent “stay of execution” budget and the stalling of the financial markets evaporated as I took solace from a newfound sense of optimism. An optimism fuelled not by tub-thumping politicians, but by two presenters who spoke at our recent annual Breakfast Briefing:
• Philip Aldrick, the Economics Editor of The Times
• Mark Long, a property investment strategist with Orchard Street.
I have therefore attempted to make sense of the schism between the shadows of pessimism which haunt me and the Aldrick-Long light at the end of our tunnel. My reasons to be cheerful are:
1. Consumer savings: according to Philip Aldrick, consumers have saved over £375bn during the lockdowns and, as soon as we start spending in shops, restaurants, bars, holidays etc, we will witness a “huge stimulus to the economy” – almost a 25% uplift.
2. The extension of support in the short-term - furlough extended to the end of September; stamp duty holiday extended to the end of June; grants for the hospitality & leisure sectors; extended business rates holiday – all these measures will help us climb out of our recession pit in 2021 and help build a platform to give the economy a boost in 2022.
3. Best performing asset class: Mark Long reassured our webinar audience that property continues to be the best performer - over the last 10 years it has outperformed equity and gilts and yield premiums are at an ‘historic high’.
4. Obsolescence: with so much structural change afoot, it will be a tale of two outcomes - obsolescence versus the flight to quality. The lack of available secure sustainable income streams in the property investment arena should ensure strong demand for the “right assets” and more speculative development in growth areas such as life sciences.
5. CPTPP: Philip Aldrick highlighted the fact that the UK has applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, one of the world’s largest free-trade regions. Perhaps this could be the backdoor to a trade deal with the US if Biden also signs up.
6. London: might have had some of its gloss dulled by Brexit, but it still remains the dominant force in Europe and globally.
7. The office: although occupational strategies and structural changes have probably changed our work practices forever (WFH for example has given birth to ‘blended office’ strategies), the office will continue to be at the forefront in the war for talent. It’s role as an ‘amphitheatre’ to project your brand and culture and create an environment where you can learn from others, build your career and build your network of lifelong contacts will never diminish.
8. Regional investments: as part of a broader regional focus, the introduction of Freeports as hubs for importing and re-exporting components and finished goods, without tariffs or custom checks and benefiting from business rates relief, no stamp duty and other tax breaks should help spread regional growth potential - albeit inevitably disadvantaging other areas. This will prove a potent stimulus and a sign that the UK is open for business.
9. The global ultra-Keynesian epidemic: governments’ mega stimulus strategies (Biden: $1.9Tn … EU: €750bn … UK: £190bn) will definitely give all our economies an adrenaline fuelled kickstart and stimulate both national GDP and global trade - but at what cost. Some sooth sayers warn that we must learn from the lessons of history. The Keynesian inspired spending of the 1960’s was followed by stagnation and hikes in inflation, unemployment and interest rates in most developed countries. Even more dramatic is the fact that the 1930s spending spree ended in war. Others gleefully tell us that we are heading for a new ‘Roaring Twenties’.
10. Squaring up beyond the support: the Magic Money Tree - QE and printing money - cannot last forever. Despite Biden’s strategy to borrow, spend with knock-on export of inflation across the pond, the planned rise in UK corporation tax, the rise in bond yields on the past week and talk of domestically created inflation will surely check many investment managers’ strategies based around bond yield and interest rates remaining on the floor for ever.
Inflation is the spectre which haunts our high spending Chancellor. Will it shoot far beyond the Bank of England’s 2% target later this year and beyond, or be tempered by rising unemployment, structural change and what’s in the basket. Can’t help but think the “roar” will ultimately subside.
I guess the Boris/Sunak strategy of launching the UK’s first Infrastructure Bank (UKIB); advocating a Green Industrial Revolution; stage managing the Levelling Up agenda (starting with the Economic Government Campus in Darlington and the UKIB in Leeds); announcing the £4.8bn Towns’ Fund; and even advocating a Corporation Tax increase in 2023 (which at 25%, will still be the lowest in the G7countries) are all measures to make Britain more resilient and immune to imported inflation.
So for anyone in the property sector, there are plenty of reasons to be cheerful.