2015 and why it will be the most significant year for a decade – especially if you are European.

Last night I had a very interesting couple of hours, at the Investment Property Forum (www.ipf.org.uk), listening to some leading investment professionals and economists talking about what lies ahead for property in 2015.

The event was held at the offices of the law firm Allen & Overy and the first indicator of past performance in the property market (2014) was given away when the host told us that A&O had had a very busy and profitable 2014 = lots of deals (investment and lease) have happened!

Savvas Savouri of Toscafund Asset Management LLP opened the presentations with a very clear but also worrying view that Europe is in for a very bumpy ride in 2015. The good news, however, is that the UK will benefit from this as human capital and financial capital will exodus Europe and come to the UK. If this happens there are some significant implications both economically and politically. The combination of this increased inflow of people and capital running alongside a General Election makes for a heady cocktail of conversation! From both of these it is clear that there is great uncertainty in the world but also more importantly within the UK and on our doorstep. This will create great opportunity for some but perhaps not all. It also raise a whole load of questions such as where will all these people settle as one might argue that if not in London and the South East then other parts of the country will see growth in population and skills capital. For retailers this will equate to more demand and more sales. Will this adjust the number of shops required to optimize a new demographic profile? Too early to tell but worth considering that ‘a bird in hand is worth two in the bush’.

Savvas went on to tell us that China is a mere teenager when it comes to world economics as they only joined the World Trade Organisation in December 2001. The UK joined in 1995 and prior to that was a member of GATT from 1948. Japan was a post war economy that grew at a similar rate to what China is doing now but the big difference is that China has done the opposite to Japan in all respects so is a far more potent and robust economy as a result. China has a mere $4 trillion in reserves to ensure this!

Next up was Roger Sadewsky of Standard Life Investments. He noted that global growth is less synchronized than it used to be as there are many more investment types with varying risk profiles. Again the good news is that the US and UK is leading growth in the developed economies but can this be sustained and if Europe implodes will the UK not catch a cold? Whilst there is positive economic news around the UK economy, it was interesting to hear Roger say that there is a lack of access to property – there simply isn’t enough. The London property market is a key example of this where land is limited and as a result yields are sub 4% in places and residential property is doubling in value every ten years. IPD (www.ipd.com) recently reported that ‘there is apparently some £36 billion chasing some £10 billion of commercial investment property for sale in central London’.

Finally, Bill Hughes from Legal & General Property took to the podium and informed us that ‘property is up 33% since the crash in 2008 but that it is still 20% below the peak’. With more money chasing the same number of assets will we see the missing 20% exceeded and by when? Offices lead the way in returns followed by industrial and finally retail. On top of this we have new use types such as student accommodation, residential and care homes to add into the mix. Student contribution to the UK economy is significant and will increase in time and hence why institutions and private equity are piling into accommodation and residential. Whilst commodity prices have come down I believe we are still short of bricks! It was good to hear Bill talk of urbanisation which is a topic I have mentioned before as this has a profound impact on the retail and leisure opportunities moving forward and with a more spread population then not just London and the South East will benefit one hopes. There was talk of rental growth across the board, which will perk up many occupiers who feel they are already paying unrealistic rents, have falling margins, increasing competition and a business rates revaluation inbound.

So in summary, there was lots of good news but I also have in the back of my mind the saying ‘be careful for what you wish for’. 2015 is going to be one of the most significant years we have seen for a very long time. Where we end up has yet to be seen politically, economically or demographically. What we do know is that the UK is currently a destination of choice for people and capital. For the retailers and leisure operators who clothe and feed the country this has to be good news but with the strong headwinds of competition, lower margins and uncertainty around politics, policy and taxation all may not live to see what they wish for.

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