• EMEA

PAs, AVs and C major

By Richard Pickering, Head of Futures Strategy

Interest rates With a degree of predictability (markets implying 90% chance), the Bank of England last week held the base rate at 0.5%. Nevertheless, this would have been a big surprise just two months ago. Why the about-face? With inflation looking to have peaked (CPI: 2.5%), disappointing growth figures (0.1% in Q1, compared with 0.6% in the US) and increased incidences of profit warnings in the retail market, the case for an increase looked weak. Where next? Markets are still predicting three 25bps increases over the next 3 years, which is supported by upward pressures on oil prices, (Brent crude almost reaching $80 / barrel on the strength of the global economy) and a tightening labour market. Regardless, the upward glide path looks shallow, and the prospect still remains for an opposite move, particularly if global growth slows. In any event, property yields empirically lag bank rate increases, and so monetary policy feels unlikely to be influential on values this year.

Generation Rent A report by the Department for Work and Pensions has found that the proportion of 35-54 year olds living as private tenants has doubled (from 13% to 26%). The same figure for those aged 25-34 is 50%. The Resolution Foundation has suggested a £10,000 ‘citizen’s inheritance’ be paid to people when they turn 25 to resolve the generational wealth gap; but has renting become the new norm? Affordability is obviously a central issue. However, so is choice. As a society, we are choosing to stay single and childless for longer; both of which play towards renting. Buying means commitment, whereas with renting comes flexibility. Corporate occupiers rarely own freeholds; partly for flexibility, but partly because they can deploy their capital more effectively in their business. Home ownership has undeniable delivered strong returns over a long period; however, in a world of subscription services, temporary licenses, and shared assets, investing so much capital in a single asset feels irrational. As security becomes less of an issue for urban singles, so we might see more people chose to rent in the future, rather than this being as a consequence of not being able to buy.

iHouse 120 years ago, new homes didn’t come fitted as standard with electric lighting.  Last year, new homes didn’t come fitted as standard with smart-home infrastructure. Now they do. Swedish developers Trivselhus are developing a smart neighborhood in Milton Keynes where 56 homes are offered for sale with integrated smart home tech. Voice controlled blinds, towel rails, switches, kettles – basically everything, comes as standard. They aren’t the only ones. Quintain has partnered with Samsung to provide digitally connected appliances in their rented scheme in Wembley Park; whereas Amazon has partnered with Lennar to create Amazon Experience Centres – model homes using Alexa as the control hub. The cost of smart home tech is typically <1% of the total build cost. Soon I suspect we will look back and wonder how new schemes could be sold without it.

WeEconomy A report commissioned by WeWork sets out stats on the impact that the serviced office giant has on local economies. Of note: (1) new businesses taking space in WeWork have a 12% higher 3-year survival rate, (2) 22% of the Fortune 500 have space in WeWork, (3) 73% of NYC members moved to the neighborhood to take space in WeWork, (4) WeWork generates 2% of NYC’s GDP from its 50,000 members there, and if members were classed as employees it would count as the largest private sector employer in the city. This reads well in an investment prospectus and charts the phenomenal rise of the operator. It is also perhaps food for thought for local government. Enabling and promoting incubator and serviced office hubs should form a central plank of a strategy to encourage the growth of small businesses. If that’s not enough, WeWork Chief Adam Neumann stated in an interview earlier in the year that he ‘would love to design a City Hall’. Watch this space.

The Uber effect In a world of long commute times, having a home (or workplace) on top of a transport node can be pretty helpful, and the cost of houses within short distances of these have carried a corresponding premium. However, we are leaving that world and moving towards one of distributed public transport, which starts with Uber and ends with autonomous vehicles. Does this threaten the price premium? A recent piece of research by MetLife suggests, yes. Looking at San Francisco, the report finds that whilst apartments within a 5-minute walk of a transit stop used to carry a rent premium to other properties of about 20%, since the introduction of Uber and Lyft this premium has fallen to 15%. Looked at another way, this highlights the liberating impact of these new modes of transport on currently underserviced areas. If this trend continues then there may be more value to be found in the suburbs.

Friends and foes Is there really any point in entering Eurovision anymore? Whilst not quite ‘nul points’, another dismal outcome highlights the futility of our engagement in the competition. Nevertheless, Eurovision does serve as a useful bellwether of European allegiances. Analysis in 2014 by UCL / Imperial College shows the UK to be in a voting bloc with Ireland, Malta and Scandinavia. We can now add Australia (in the deep south of Europe) to that list. The most-chummy relationships are Moldova & Romania, Cyprus & Greece, and Germany & Turkey. Against popular perception in the UK, the study found no evidence of systematic negative bias. Instead the biases are largely created around positive allegiances based on culture, proximity and migrant populations. Meanwhile, a 2017 study by the University of Florida notes that not all allegiances are two-way; for instance, our consistent voting for Sweden is sadly not reciprocated. Finally, analysis by Spotify strangely suggests that the song might actually have something to do with it. Sad songs in C major are in that respect most successful.

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