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Property Investors Update

06-09-2018 team

Ten Years: It’s been ten years since the last major recession – precipitated by the financial crisis of 2008. Years of austerity measures in Europe are finally taking their toll. Most of Europe is beginning to see real economic growth now – this seemed to start around early 2017 just when the UK economy started to slow down post Brexit referendum shock in June 2016.

It certainly seems time for another financial panic induced recession in Europe for a number of reasons:

USA Blowing Hot and Cold: Europe’s great trading partner the USA has just installed steel tariffs which fires the gun on a trade war of sorts – something business does not like – and this in its own right should lead to lower investment confidence and a slow down

Oil Prices: Oil prices have risen sharply from $28/bbl in early 2016 to $75/bbl now – which creates a huge drag on most European economies that rely heavily on oil imports from the Middle East, Russia and Norway. The most energy intensive countries with weak manufacturing are normally hit the hardest – and these are Greece, Portugal, Spain and Italy. These countries import almost all their oil and gas, along with coal, metals etc.

Migration Issue: Massive migration of people from Africa and the Middle East (e.g. Syria, Afghanistan, Turkey, Iraq) has created huge political and social strains in Europe. This has spawn many right-wing national groups and movements – a big lurch to the populist right or far left wing. The migration has been partly caused by wars, by hot climates and pressure on resources like water, land, farming etc – in part because of a massively expanding populations in desert areas – many of them war torn. People have literally felt like getting away from the war, famines, hardships, heat and lack of water – trying to find a better life despite the risks. Many of these people have not been welcomes in Europe – and we now see the rise of far right groups in Italy, Spain, Germany and even the UK with the rise of UKIP prior to the EU Referendum. We expect these pressures to remain very high because in the medium to long term – the population of Africa and the Middle East is forecast to skyrocket and hence more people will naturally want to venture north to cooler climates and more prosperous areas looking for jobs and opportunities. The cost of trying to create a super environment in Africa and the Middle East to stop them wanting to come is almost certainly prohibitive. Many European countries need these people because otherwise declining populations and low fertility rates, but of course countries like Italy see their culture changing and have been asked to take a disproportionally large amount of immigrants simply because they are the nearest country to desperate war torn places like Libya.  Its also worth pointing out that it was the European bombs that destroying Ghadaffi and left the place leaderless with multiple warring factions taking over – things still haven’t settled down 8 years later.

Spain: Recently Spain got a new populist socialist party running the country – with Italy a new coalition of the far left socialist and far right nationalists who are now running the country. They want to lift sanctions against Russia, stop immigration, are considering a Referendum on the EU potential exit and will no doubt be a thorn in the side of the rule Euro elite non-election bureaucrats in Brussels. Junkers response was to tell them to stop blaming the EU for "everything going wrong in the south of Italy" and to “work harder to fight corruption”.

European Project: We believe that the whole European project will unravel and break-up if there is another refugee crisis. So far this summer, its not looking too severe – but the European Parliament and Commission have not been able to stabilize the crisis and there could be more uprisings of the populist left and right if something tangible is not don’t about it soon. It was almost the downfall of Chancellor Merkel, it indirectly lead to Cameron resigning off the back of the EU referendum, the far right almost got into power in Austria and now we have a true populist anti austerity party in power in Italy – the fourth largest economy in the EU.

Divide and Conquer: On a larger scale – the old post war alliances are starting to break down. Its seems that people like Putin and Trump prefer to divide and conquer – almost like a strategy to achieve more global power through not sharing and through nationalism. Obviously this is very dangerous – higher risk – because nationalism can lead to world wars – we only need to look back at what happened when we had nationalist governments in Germany (Hitler – Nazis), Russian (Stalin) and Japan during the 1930-1940 to see the end outcome. Lets hope its nothing like that this time. But what they tend to do is blame “minority” groups for the countries ills and we have certainly seen more of the globally in the last five years.  

Nationalism as a whole is bad for business because trade wars, trade barriers and animosity leads to lower GDP growth, a poorer higher risk investment climate and this would normally feed through into lower house prices (or less house price increases) and lower investment levels. Tariffs can lead to higher general inflation which then leads to lower disposable income and lower house prices. We believe we are seeing some of this in the UK as outcome of the Brexit uncertainties. When we consider Brexit, undoubtedly it is about nationalism in some shape or form – namely:

• The UK wants control of its borders – and hence inward migration levels
• The UK wants to decide its destiny and want laws only to be proposed then approved in the UK – it does not want laws imposed from Brussels
• The UK wants to be able to make its own trade deals – current the EU makes all of UK’s trade deals

The price to pay is likely to be high -because the EU will of course want to and is penalising the UK for wanting this divorce, they feel let down just like you would if your partner turned around and said “I’m leaving”.

Brexit Will Happen: An interesting point is that if you did a poll on how many people actually thought we would leave the EU if the country voted by a 2% swing margin to Brexit (that’s by about half a million people out of the population of 65 million) – then we’re pretty sure that 2/3rd of people would have said they still though we would not leave. But what we have is a Tory government where 70% of the Tory voters wanted to leave and a far-left Socialist opposition party where the leader Jeremy Corby and his cohorts also want to leave. They means in parliament there is enough support to make it happen, to achieve Brexit. To give Teressa May her credit, she is simply doing what the Tory party faithful want to do – she’s doing it for her party – that’s her job. And in doing so – she shuts up UKIP and the far right. Its an interesting dynamic – but what it most certainly means is that we WILL have Brexit – make no mistake. It will be forced through. To do a U-turn would now create even more division and animosity. Can you image what people like Boris Johnson, Nigel Farage, Michael Gove and the like would do if people like Tony Blair, Junker and George Soros – the global political elite – got their way.

Do we Trust Soros: Which brings us onto George Soros. Frankly – how can this person that single handedly destroyed our chances of joining the Euro after his run on the pound in the 1990s, who is an American citizen and lives in the US – of Hungarian extraction – have the nerve to pay millions and openly support and campaign to revert UK Brexit. Interfering massively in UK politics from a range – somehow it just doesn’t feel right- can we really say this person has the interests of the UK population at heart when he’s been so destructive to the UK before. We admire Soros for being a successful businessman, but this seems like gross interference from a very powerful person who has almost no investments in the UK and lives in the otherwise of the world. He does not visit the UK regularly either.

House Prices: One could argue that UK house prices are depressed currently because of Brexit and all the uncertainties this is giving. There are two key scenarios that need to be considered.

Good outcome: Brexit will create some turmoil but the Tory party will muddle through and do just enough to win the next election, then as things settle down, the UK gets into a higher growth curve as trade picks up and we unshackle ourselves from a low growth Eurozone

Disaster Outcome: Brexit creates severe turmoil to such an extent that the UK electorate become disillusioned with the Tory party and blame them for the economic difficulties – which then let Jeremy Corbyn’s Labour back into power in the elections of 2022. This would be a disaster for UK economy and lead to a recession, higher unemployment, higher interest rates then a house price crash particularly in London.

Which Scenario: The scenarios are probably about as likely. Thoughtful investors certainly have the threat of a Labour victory high on their risk analysis register – rightly so – and this currently is probably dragging the economy down as well – the mere threat of it – the uncertainty of it happening. The Tory election of May 2017 was a disaster – they only have a majority of about 9 with the Unionist and this could change during the Brexit negotiations.

Supply-Demand: Since the Brexit vote, the demand of property will have dropped with less inward migration but the levels of building has also dropped – very few properties are being built because of the uncertain business climate and no assurance of strong future demand. Too many builders almost collapsed during the 2008 downturn, so they have no appetite for risk. Hence we predict building levels will continue to drop – not increase – and this will if anything worsen the supply-demand imbalance. The draconian buy-to-let taxes also reduced supply since much of this investment has stopped because it is uneconomic and hence builders are not building flats that would have been purchased by these buy-to-let investors. This is therefore worsening the housing crisis – and rental crisis.

Uncertain Climate: With all of the external uncertainties, already fairly high property prices, new buy-to-let taxes and the threat of a Labour government, its not exactly a good business climate to be operating in – and hence many buy-to-let investors are either going nothing new, or even partly selling up. There is not much growth – because the economics have been impaired so badly by the new taxes – along with new regulations, council interference, red tape and laws that frighten most investors away.

Longer term if the Tory party stay in power, we might see some real growth but for now – its seems to be hunkering down time – wait and see time.

We hope this Newsletter has been helpful in framing your investment decisions during these uncertain times, and if you have any queries, we can ben contacted on  

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