For this week’s commentary, I wanted to avoid simply reiterating all of the more obvious issues that have followed on from the UK EU referendum, as I’m sure everyone is “Brexited out” at this stage. I will, however, highlight an unintended consequence of the vote’s outcome.
Whilst the newspaper headlines zoom in on sensational issues to sell newspapers, such as the suspension of dealing in a number of UK commercial property funds, the reality is that this does not have a lot to do with Brexit.
UK “bricks and mortar” property funds are unleveraged vehicles that own portfolios of real estate assets that are diversified across the various sub-sectors of the commercial property market. Because they offer daily or weekly liquidity to investors, yet their assets take some time to sell, they usually hold a 10-20% cash reserve to fund redemptions. When this runs out, they simply need to suspend redemptions until the next proceeds from building sales are received and they are able to pay out. There is a clear liquidity mismatch and investors clearly did not do their homework carefully enough if they were at all surprised at recent events. Whilst I believe UK commercial property probably needs to be revalued down slightly, due to current fundamentals, this is not another example of a 4x-geared disaster of the 2008 financial crisis.
In fact, the Aberdeen Property Fund has already resumed dealing (albeit at a 19% discount) and Standard Life Investments has also made a number of property sales within their funds, to be able to offer more liquidity, as you need liquidity to be able to treat customers fairly. Meanwhile, listed Commercial Property Trusts (REITs) with none of the aforementioned liquidity issues, are down 15-20% since Brexit and arguably represent a much better entry point for income yield hunters or long-term property investors today, especially for buyers from hard currency such as U.S. Dollar investors.
Anyway, enough of sensationalist journalism that is simply looking for some global financial crisis story and unnecessarily scaring the public! The real Brexit story is that it will take years before the details of even the biggest and most urgent negotiations between Britain and the EU will be known. To quote the UK’s new Prime Minister, Theresa May, “Brexit means Brexit”. That said, she is unlikely to trigger Article 50 of the Treaty of Lisbon until next year – which will then formally launch the process of separation and start the clock ticking on a two-year countdown to Britain’s actual departure.
To make sensible long-term investment decisions one needs stability and clarity, neither of which presently seems to exist in the UK. Volatility will be with us for many months, if not years, as the dust settles on immigration, trade, financial services, defence and pensions, to name but a few.
Having taken over from David Cameron (who has allegedly gone off to play more golf) Mrs May has formed a government with the monumental tasks of extricating the UK from the European Union, uniting a fractured nation and Tory party and delivering that much-needed stability and clarity. May, who has been the UK Interior Minister for the past six years, is seen by her supporters as a safe pair of hands, and able to steer the country through the disruptive Brexit process. She also becomes the UK’s second female prime minister, after Margaret Thatcher.
According to a quote attributed to Jeremy Hunt, the Health Secretary in both the Cameron and now May cabinets: “I think, around the cabinet table yesterday, the feeling was that we have our Angela Merkel……We have an incredibly tough, shrewd, determined and principled person to lead those (Brexit) negotiations for the UK.”.
I am sure it hasn’t escaped your attention that both the elected leader of the UK and the Premier the EU’s largest and most prosperous member nation, Germany, are both women, as are the potential next elected leader of the U.S., the head of the International Monetary Fund (IMF) and the chair of the U.S. Federal Reserve. Maybe this is a perfect example of a change for the good and (please forgive my flippancy) maybe us men should just head off to the golf course and finally let the ladies sort out the mess we are in!
Have a good weekend – I’m off to play golf!