By Alessandro Pasetti, 15 March.
At times, reading the doom and gloom surrounding the real estate market can be rather entertaining, especially given that what one reads in the British press appears to be driven by political ideology rather than an objective assessment based on hard figures — properly balanced analysis seems absent, in my opinion.
Latest news about the health of the real estate market in February, which points to the weakest growth in six months, was a case in point, and clearly omits other factors that are perhaps more important when it comes to determining the big picture for investors. Yes, London is struggling — click here to find out how Inveztments can boost your returns nonetheless — but look at the chart below.
Residential prices in London have more than doubled over a decade, so even if they correct or plateau over the mid-term it will ultimately be considered “a healthy adjustment”.
That said, ever heard of the “FAANG trade” in the stock market?
Here is why it is relevant if you are a property hunter.
Heavyweights Investing In A Top-Class Strategic Hub
FAANG is the acronym for five global high-tech companies —- Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL) — that have made big investment plans in London.
Even if you haven’t heard of them from an investing perspective, their combined market value (FB’s $538bn; AAPL’s $913bn; Amazon’s $ $764bn; NFLX’s $143bn; and GOOGL’s $806bn) is higher than the GDP of the UK, and these five alone are behind the rally in the Nasdaq Composite Index, whose trends are shown in the charts below.
(Source: Yahoo Finance)
(Source: Yahoo Finance)
How much these companies invest in the UK is a direct function of the appeal that the UK historically has exercised over foreign investment. In early 2017, Reuters reported that the UK had “landed record foreign investment in year of Brexit vote“, while the chart below should help you understand why Brexit means less than you think it might if you are in the bear camp.
Ironically, 2016 was a record year for Foreign Direct Investment in the UK.
Now look at the table below, and spare a thought about the value of FDI inflows on a comparable, annual basis.
(Source: Office for National Statistics)
If you believe the bears are right, you might be inclined to suggest that the suitors of SAB, ARM and BG (AB Inbev, Softbank and Shell, respectively) squandered about $200bn in total (7.5% or so of the domestic GDP) in deals that were done exactly at the right time, and possibly at the right price, while paying awesome premiums to the shareholders of the targeted companies.
Then combine that knowledge with latest available trailing data for FDI as of January 2018, as shown in the chart below.
While the environment is ripe for consolidation in many industries, with the final offer by Melrose for engineering company GKN comfortably surpassing the $10bn price tag this week, it appears evident that deal-making is part of a dynamic and more efficient competitive landscape (than elsewhere in Europe) where some of the stories about the FAANG’s plans also should have left you in awe.
(Perhaps you saw other headlines this week, such as “Unilever Abandons UK Headquarters“ — but so what?)
F) Facebook London HQ set to be build at King’s Cross (5 February 2018)
A) Apple’s park takes root inside the $5bn HQ (15 January 2018)
A) Inside Amazon’s giant new UK HQ in London (26 July 2017)
N) Netflix crowns strong year for London tech with new HQ (22 December 2017)
G) Google hails Britain as a ‘great home’ as it starts building its new £1bn London HQ (21 November 2017)
If FAANG trends are an obsession for you, as they are for me, their individual performances in the table below might explain why.
(Source: Yahoo Finance, 2-year performances of FB, AAPL, AMZN, NFLX and GOOGL.)
Counterintuitively, however, their rise says a lot about how far the perception of risk has gone in a market where property investment continues to be a safe haven for many retail investors I talk to.
The war of words between Paris, London and Frankfurt concerning who will take control of financial matters on this side of the Atlantic if the UK doesn’t strike a good deal is nothing new — the topic has been debated for decades, but the reality is that London belongs to a different league, and it’s not fighting for European hegemony. Rather, it’s in the race for worldwide dominance.
“London Retains Its Crown as World’s Top Financial Center” ran the Bloomberg headline in September.
My sources in financial circles acknowledge some degree of uncertainly, but all of them still live, produce and get richer thanks to the emoluments they earn in the City.
Talking of bankers, Bank of America, SMBC and Deutsche Bank (click here, here and here) are just three of the major global banks to have renewed their leases in London, it recently emerged, while Citigroup (which decided to move some of its operations to Frankfurt) surely knows the importance of the UK, and decided to set up an innovation centre in the capital.
The bears could point that JP Morgan has plans to “give up on new HQ in Canary Wharf” but the site was reportedly earmarked for £1.5bn. And anyway, perhaps one could argue JP Morgan doesn’t need additional space in Canary Wharf at all, as it acquired the office of Lehman Brothers in 2010, and the assets up for sale could be remunerative.
In terms of non-residential space at a premium, I think you might want to pay attention to the latest annual figures recently reported by Segro.
As I recently wrote for Transport Intelligence, this logistics property developer gained about £1.5bn in market value over the past 12 months and it is now worth £5.5bn thanks to solid growth rates and falling loan-to-value ratio. While management was certainly upbeat about trading conditions, it is interesting to note how the message surrounding Brexit risk has changed in only twelve months.
Values of UK commercial real estate fell in the aftermath of Brexit, but the impact was limited for industrial assets compared to other real estate sectors, and last week’s filing with the London Stock Exchange barely mentioned Brexit, simply noting that “structural drivers of demand appear to have continued to outweigh Brexit-related uncertainties”.
In a way, we are currently in a vacuum, as the prices of several asset classes prove.
The exchange rate, for example, has been on standby mode since it rallied last summer, having consolidated the 1.13 area against the euro…
… while the yield of the 1o-year gilts have slightly retraced from the multi-year highs earlier this year, thanks to more accommodating monetary policies than at any given time in the past decade.
But look at the latest headlines about mortgage approvals, and the structures that are being marketed:
On cue, nominal growth rates stats are also impressive — “ONS Finds Investment Property Prices Up 5.2 Per Cent In 2017” Residential Landlord reported last month.
While many wonder what kind of deal politicians would cut — and obviously some downside is possible if a hard Brexit scenario emerges — the remain odds long the UK government will be left grappling with highly unfavourable exit terms. So, the obvious question for me is how could you profit from protracted uncertainty in the UK landscape?
I suggest you read our previous coverage, and reach out to the Inveztments Team at the link below if you have questions.
To contact the team and discuss the prospects of their flagship projects, please click here.
(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha, The Loadstar, Transport Intelligence and others. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan.
It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014. )