Hello All! I hope you had a great Christmas break and a good start to the New Year! This is my first week back in the office, which meant that thanks to Monday’s strike, it kicked off with my normal 20 minute commute being turned in to a marathon 2 and a half hour trek. On my journey in I thought it would be a good time to open up the debate on what 2017 holds for the property industry. Now I make no claim to be Mystic Meg, if I was I’d be sitting on a beach in the Maldives right now rather than writing this, but if you have interviews coming up this could well be a topic. Predictions have always been a risky business, as seen from the huge number of unexpected events that took place in 2016. From the death of a staggering number of cultural icons to the mind boggling wins and losses across both the sporting and political arena, the only thing guaranteed in 2016 was change that defied all logic or pattern.
We saw 2016 throw up fundamental political change on both the domestic and international scene, with both Brexit and Trump. These two political events now carry on over, with Trump’s inauguration set for 20th January 2017 and article 50 set to be triggered by 31st March 2017. What effect will this have on the UK property market? Well I’m going throw my hat in to the ring and say my prediction is very little in terms of direct impact. There is no doubt that negotiations will be long and bumpy but whilst tenants signing new leases may demand more flexibility, there is no sign of occupier demand waning, although possibly bolstered by a decline in commercial development. Indeed retailers have shown over the last couple of weeks how strongly they are trading post Brexit. The devaluation of the pound has led to tourists coming in their droves. January has seen 80% more Chinese tourists visit London in January then in 2016 – although this has also been aided by a simpler visa system. Theresa May was smart to reveal when article 50 would be triggered as it now comes as no surprise. Of course with any major political event, there will be a short term jitter within the financial markets and some savvy forex traders will make a killing. However I’m confident that this will stabilise without any long lasting repercussions. Overall there are signals that we should stay positive about the UK standing on its own!
As for Trump many are quaking at the affect this American President will have on either his homeland or the UK market. However many in the States are happy with their choice – running media blunders and views aside! From a real estate perspective, Trump’s net worth has never been officially disclosed but Forbes puts it at $3.7bn. His family stands to lose 40% of it to estate tax. If he abolished the tax, he would increase his family wealth by 2/3rds and if Forbes is right that’s another $1bn in the family coffers! Indeed the abolition of estate tax has been a Republican priority for many years. Leaving aside any cries of self interest and corruption, this will of course be seen as a giveaway to the very rich (0.2% of the nation) but the Republican’s will argue that the tax discourages savings and investment and that by repealing it they will supercharge the economy. In reality eliminating the estates tax would cost $174 billion, a drop in the ocean compared to Trump’s proposed drop of corporation tax to 15% that would cost $3.2 trillion!
So what about here in the UK? In my opinion, the 2017 event destined to cause the biggest headache for our sector will not be Trump but the rates revaluation that comes into effect on 1st April 2017. I appreciate we’ve all known about the rates revaluation for some time and arguably this should have been built into business plans for both tenants and landlords. However, the true implications and it’s magnitude will only be felt once retailers start to suffer. 2017 will see retailers faced with substantial cost increases as they take a triple hit on revenue with fixed, variable and costs of goods all on the rise. Some business rates in London are increasing 150%! The only way to combat this is either to reduce rents with landlords to offset rates liabilities, make staff more productive to counteract cost of living wage and/or move your operations/suppliers to the UK to avoid the currency devaluation or impending EU tariffs.
So who’s offering us a shining light? In my sector (retail) Boohoo.com have recently revealed outstanding results with the best FTSE performance of 2016. This resulted in a 109.2p share value increase over the 52 weeks – that’s a 300% increase! How have they done this? Well their new concept is ‘Rapid Fashion’ which is the new version of ‘fast fashion’ pioneered by ASOS. To put it in perspective Boohoo.com turn around their material from supplier to consumer within 1 week, compared to ASOS who achieve it in 4 weeks. How have they competed against one of the world’s largest fashion retailers? Well Boohoo.com are based in Manchester, the previous heartland of the British textile industry, and their suppliers are all based locally. This will protect them from any tariff that the EU may impose on us or the devaluation of the pound. In addition they have semi-automate their UK distribution, speeding up and increasing the accuracy of its despatch process with an advanced robotic sorting carousel that consists of five infeed conveyor belts and 100 packing stations. This extremely fast and accurate service makes it difficult for competitors to compete. Along a similar vein logistics assets look set to continue as an investor favourite.
So my prediction for 2017 is ‘globalism’ is now on the decline to be replaced by a form of ‘localism’ that will be generated on the back of AI, advanced robotics and additive manufacturing (better known as 3D printing). This will lower production costs and outweigh the cheaper supply and labour costs of longer chains in faraway countries. Those who grasp the mantle of technological pioneer will be the winners.
Let me know your thoughts, obviously there are a number of other threats and opportunities facing us. You may think a China economic slowdown, April’s changes in tax relief for landlords of residential properties or Le Pen election in France are more likely to pose problems – or you may think 2017 will be the year we have nothing to worry about at all. Here’s hoping!