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Commercial Property in a Post-Covid World

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What are the prospects for commercial property in the future?

This is one of the most commonly asked questions by many, as a result of our current affairs.

Our New ‘Normal’

We have all by now – in our new normal world – gotten used to meeting our dearest friends, family, confidants and work colleagues via Zoom or Skype. Whether it be working from home, group meetups with friends, family catchups or shopping online.

High streets and shopping malls were struggling even before the events of 2020; with Debenhams and several middle-market food chains struggling. This has led some investors to beg the question – what does the future hold for commercial property?

Will everyone work from home? Will companies reduce their office space needs, providing workers with a hot desk each morning, if they are in? Will retail companies go into administration to put pressure on landlords to reduce rents? Will more people shop online?

The answer to all of the questions above, is probably ‘yes’.

Edinburgh
Photo of buildings in Edinburgh

What does this mean for Commercial Property?

Does that mean that we should all abandon a well-diversified, liquid exposure to global commercial property accessed via real estate investment trusts (REITS), which are listed property companies, focused almost exclusively on generating rental income? We think not.

First, let us look at the flipside of the changes that are occurring.  To be sure, some sectors may struggle.  But for every Debenhams, there will be a company moving into, or even starting up, online, which will require logistics centres and warehousing.

In our digital age, there is increasing demand for secure and up-to-date data centres. For example, improved and more numerous healthcare facilities.  You can see from the chart below [Figure 1] that the global commercial property REITs, real estate investment trusts, cover many things.

Figure 1: Commercial property REITs represent a basket of multiple property types

Source: FTSE EPRA Nareit Developed Index Factsheet www.research.ftserussell.com

As we can see above, commercial property REITs cover a range of property types. These property types can include industrial and office spaces, holding and development, specialty, residential, retail, hotels and lodging facilities. All of which, will still be required in our post-Covid future.

In a globally diversified REIT index fund, there are over 350 individual REITs (listed property companies) each of which is comparable to a property fund in its own right.  It is estimated that such a fund contains around 90,000 properties [2] spread across property types, global markets, and strategies – this is hugely diversified.

Second, let us spend a moment thinking about markets.

Photo of shop in Edinburgh

Concerns About Markets Over Time

These worries about the retail sector, for example, have been around for some time and you will not be the only person thinking about these issues.  In fact, thousands – or even millions – of people will already have done so and acted on their view of the future of property, by buying and selling these REITs in the market.

The aggregate view will be reflected in today’s REIT prices: all the doom, gloom and uncertainty is priced into the process of REITs already; all the likelihood that the way we work changes is priced in already; and all the good news about data centres and warehousing is priced in already.

Future Prospects of Commercial Property

So, the future prospects for commercial property will depend on what happens relative to this expectation.  It may be better or worse, depending on information we do not yet know.  The release of that information is random.  What we do now is that commercial property will continue to be needed and that companies will have to pay rent.  We would not abandon owning a diversified equity portfolio because some sectors are struggling (airlines and energy) or concentrate our portfolio in sectors that are booming (technology).  It is already in the price.  Companies and sectors wax and wane.

Third, let us think about why we hold it in portfolios in the first place.  Property tends to have a different return experience to equities (even though property companies are listed on stock markets).  At specific times, and across time, this can provide diversification to a portfolio.  In addition, over time property has provided protection from inflation; after all, a property is a property and many rental agreements are linked to some measure of inflation.  With the rapid increase in the money supply, on account of all the government support packages around the world, higher inflation – not something most feel the need to worry about currently – is one future scenario.  Cover the bases – but all things in moderation – is a sensible approach.  A small allocation to global commercial property still makes sense for long-term investors, as part of their diversified growth assets.

What this means for Wells Gibson

At Wells Gibson, we build a deeply diversified portfolio for our clients and we let capital markets do the heavy return lifting. We look beyond the headlines of daily market news and commentary and maintain a long-term perspective. Holding securities across many market segments can help manage overall risk, the above being no different.

We create an investment plan to fit your needs and risk tolerance, diversify globally and stay disciplined through the inevitable market dips, turns, twists and swings.

As always, if you have any questions related to the above, suggestions for future topics to cover or anything else, please do not hesitate to get in touch with us. You can do this via our online contact form, email or our various social channels.

References

[1] Figure 1 Source: FTSE EPRA Nareit Developed Index Factsheet www.research.ftserussell.com

[2] Source: Prologis is the largest REIT at 5% of the index and owns ~4,500 properties.  Scaling this up implies around 90,000 properties across the index, as a rough proxy.

https://www.ftserussell.com/

https://www.albionstrategic.com/

All photos are from Unsplash.

Header photo by Étienne Beauregard-Riverin.

Modern Apartment Building by Grant Lemons

Edinburgh photos by RΛN SHOT FIRST and Madeleine Kohler.

Disclaimer and Risk Warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Why Owning a Broadly Diversified Portfolio Makes Perfect Sense

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At times like this when there is great uncertainty, wouldn’t it be great if we had the means to look into the future? Perhaps not some might argue. Unfortunately, we don’t know the future – no one does.

When it comes to investing, it can be tempting to run ‘what if’ scenarios in our heads, such as ‘perhaps I should move into technology and pharmaceutical companies – as surely these will do well’ or to pick out specific companies that appear likely to thrive in the future.

However, two challenges exist.  The first is that you won’t be the first person to have thought this and the combined views are already reflected in market prices. The second is that in making such focused bets you have a high chance of being wrong and missing out on the companies that actually end up driving future returns. Remember, 30 years ago Amazon and Google did not exist.

To get a feel for what these focused risks look like, academics are able to explore a vast amount of equity market data in the US, known as the Centre for Research in Security Prices (CRSP) database.

One such study[1] reveals some surprising and useful findings between 1926 and 2015.  Whilst investment wisdom and empirical evidence support the case that equities, in aggregate, outperform cash over longer periods of time, a closer look at individual equity returns tells a very different story. Here are some of the insights that the paper provides:

The median time that an equity/share is listed on the CRSP database is only seven years, during the period 1926 to 2015. That’s not long.

Just over 40% of all equities/shares have a holding period return that exceeds the return of cash (in this case one-month US Treasury bills) over the period that the equity/share was in the database. More than 50% deliver returns that are negative. The median lifetime return on any single equity/share was -3.7% p.a. That’s not good.

26,000 equities/shares have appeared in the CRSP database since 1926, yet only 36 survived the entire 90-year period. That’s not many.

US $32 trillion of wealth was created between 1926 and 2015, which has been generated entirely by the top 1,000 companies, representing less than 4% of the total number of companies listed over time. The top thirty companies (0.1% of all companies) accounted for around 30% of the total stock market’s wealth creation. That’s pretty concentrated.

This is why, at times like this, and in fact across all time periods, we believe it makes enormous sense to remain highly diversified, so as not to miss out on the next Exxon (the firm that has added most value to the US market ever), Apple or Amazon.

Now, let’s look at how the top ten US firms by revenue changed between 2000 and 2010 and again between, 2010 and 2020.  The results are so revealing.  Just look at the new companies making it into the top 10 in 2010 and then in 2020.  Look at the names which disappeared from the top 10 in 2010 and again in 2020.

Top 10 US companies by revenue over time (2000, 2010, 2020)

Source: Fortune 500

Correctly picking which few companies are going to be driving market returns over the next decade or two will not be easy, or likely. Even if you could, remember the majority of us are investing for more than 20 years.

At Wells Gibson, we believe it makes perfect sense to own the top companies by owning a broadly diversified portfolio which invests in thousands of companies.  Missing out on these companies, perhaps that don’t even yet exist, could make all the difference between a good investment outcome and a very poor one.

Please keep safe and don’t hesitate to get in contact if you have any questions.

[1] Bessembinder, H., (2017) Do Stocks Outperform Treasury Bills? WP Carey School of Business, Arizona State University.
Photo by Colin Horn on Unsplash

Today’s Market Falls in the Context of History

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It’s been another tough week for capital markets however, context is an extremely important tool when it comes to investing.

All investors around the world will be feeling the emotional pressures of the recent rapid equity market falls, either because they can remember previous falls and times of uncertainty, such as the Global Financial Crisis (2007-2009), or as younger investors, they have not yet experienced material market falls.

We obviously cannot see into the future, however the global equity market falls we have seen since January, of under 20% or so at the time of writing, sit well within previous falls since 1970.

In terms of expected ranges of outcomes, we generally estimate that 95% of the time annual equity market returns should sit within an approximate range of + 45% to – 35% albeit outliers do exist beyond these limits.

The table below provides numbers around both the depth and recovery times for each of the five largest falls since 1970.

Peak dateDeclineTrough dateRecovery dateDecline

(months)

Recovery (months)
Sep-00-49%Jan-03Dec-102995
Jan-73-40%Sep-74Jan-762116
Jan-90-35%Sep-90Jan-93928
Sep-87-29%Nov-87Mar-89316
Jan-70-19%Jun-70Jan-7167
Jan-20-19%

How deep or long the current fall will be, no-one knows.

There will certainly be more rises and falls to come.  Yet we should take some comfort from the fact that things have been just as challenging at times in the past, albeit for very different reasons.  Recovery times sit well within the investment timeframes of most investors.  It is worth noting that an investor in global equites today has, in nominal terms, more money than they did at the end of April 2018, despite the market falls in late 2018 and those recently experienced.

These are tough times for all of us and for our Nation, but the words of wisdom that we always return to at these times are those of the legendary investor John Bogle, “This too will pass.”

This will pass and from an investment perspective, the key message is to be brave and disciplined as a fall only becomes a loss if we sell.

Remember, we are always available to take your call or answer your emails.  Please feel free to contact Wells Gibson, if you have any specific questions or simply if you would like some reassurance.

Photo by Jerry Zhang on Unsplash

Top Tips for Staying Calm in Today’s Markets

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At times like this, it is sometimes worth reminding ourselves that it is this very uncertainty of shorter-term market outcomes that delivers investors with returns above those of placing bank deposits.

 

This allows us to grow our purchasing power over time.  In the case of equities / shares, this uncertainty can be high as the market adjusts its view of long-term earnings and the discount rate it uses to establish market prices.  If there was no uncertainty, then there would be no equity premium.

 

In contrast to the recent sensationalist headlines, such as the BBC’s ‘Coronavirus fears wipe £200 billion off UK firm’s value’, the never-published headline of, ‘Over the past 10 years global equity markets have turned £100 into £266, so giving a bit back is perhaps to be expected’ provides some comfort to those already invested.

 

To those who aren’t invested or have money to invest, equities / shares are cheaper than they were at the start of the year.  Good news does not sell as well as bad news!

 

You may be asking yourself whether this health-driven market event is different to those that have gone before.  It is, but only because every market fall is driven by a different combination of events that impact on future corporate earnings.  What should remain the same is our response to it; avoid panic, avoid unnecessary emotionally driven investment activity, believe in your portfolio and the power of markets and capitalism to recover in time.

 

Here are some tips for clients of Wells Gibson, to help keep things in perspective: 10 things to remember during a market fall.

 

  1. Embrace the uncertainty of markets – that’s what delivers us strong, long-term returns. Remember that you own lower-risk, defensive bonds in your portfolio too.  Your portfolio won’t have fallen in value as much as the headlines.

 

  1. Don’t measure your portfolio’s performance from the top of the market, but over a longer and more sensible timeframe. Over the past five years, investors have received handsome growth.  Even over the past year, equities are only a little below where they started.

 

  1. Don’t look at your portfolio too often. Get on with more important things.  Once a year is more than enough.  If you are looking every day, don’t.  Stop listening to the news too, if it concerns you.

 

  1. Accept that you cannot time when to be in and out of markets – it is simply not possible. Resign yourself to the fact.  Hindsight prophecies – ‘I knew the market was going to crash’ – are not allowed.

 

  1. If markets have fallen, remember that you still own everything you did before (the same number of shares in the same companies, and the same bonds holdings).

 

  1. Most crucially, a fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell?  Falls in the markets and recoveries to previous highs are likely to sit well inside your long-term investment horizon i.e. when you need your money.

 

  1. The balance between your growth (equity / share) assets and defensive (high quality bond) assets was established by Wells Gibson to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially. If necessary, we can rebalance your portfolio to make sure that you have the right level of equities to benefit from future market rises.

 

  1. Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of equity market falls. Be confident that you have many investment eggs held in different baskets.

 

  1. If you are taking an income from your portfolio, remember that if equities have fallen in value, you will be taking a lot of your income from your bonds and not all from equities when they are down.

 

  1. Wells Gibson is here – at any time – to talk to you. We will urge you to stay the course and hopefully be a source of fortitude, patience and discipline.  In all likelihood we will advise you to sell bonds and buy equities, just when you feel like doing just the opposite.

 

 

State pension age equalisation is here

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State pension age equalisation has taken place in the UK.

The gradual change now means that women qualify for their state pension from age 65, the same age as men.

State pension equalisation has taken a long time, 25 years in fact.  During that time, the age rise for women was gradually phased in, with women celebrating their 65th birthday on 6th November 2018 the first to qualify for a state pension at the same age as men.   Despite equal ages for state pensions, equality of retirement income remains a long way off.  Maike Currie, Investment Director at Fidelity International said:

“The pension system is relatively equal if people follow the same working pattern from age 20 to retirement, but they don’t.  Women are more likely to have fragmented careers, be self-employed or work flexibly during their working life as they continue to bear the brunt of the childcare or take a career break to care for sick or elderly relatives.

“Of course, these factors are increasingly affecting men too, however, the average women’s pension pot is already much lower than the average man’s so women need to have the ability to catch up. As the Cridland report pointed out, in the first year of retirement women are expected to have 25% less income than their male counterparts.”

The final report from the Cridland Review was published last year and made a number of recommendations in respect of the state pension.  Report author John Cridland, a business executive, proposed an accelerated increase in the state pension age.  It is already due to rise to age 68 between 2044 and 2046, having an impact on those born after 5th April 1977.  Cridland wants to see the state pension age rise to 68 between 2037 and 2039, bringing this increase forward by seven years.  As a result, anyone born after 5thApril 1970 would have a higher state pension age.

Further rises in the state pension age seem unavoidable in light of improving life expectancy.  Without a higher state pension age, people living for longer would make the state pension unaffordable for the taxpayer.

The Cridland Review also recommended abolishing the ‘triple lock’ for increasing state pension payments each year.  This currently gives state pensioners a degree of protection from price inflation, with their state pension income rising each year in line with the greater of average earnings, price inflation or 2.5%. Instead of having this triple lock in place, John Cridland proposed that state pensions in the future rise in line with average earnings.

One group who are unhappy with the equalisation of state pension ages for men and women are 1950s born women represented by the Women Against State Pension Age Inequality (WASPI) campaign group.  They are arguing for government compensation after claiming to be unaware their state pension age would rise, as the government did not routinely write to women to let them know about the change.

Your state pension is likely to form an important part of your total income in retirement.  It’s important to understand when you will start to receive a state pension income and how much this is likely to be.  A good place to start is requesting a free state pension forecast at gov.uk/check-state-pension and then speaking to your financial planner to incorporate these figures within your overall plan for retirement income.