By Richard Pickering, Head of Futures Strategy
A wasting asset It has been a busy day in the Commons today, starting with David Davis’ interrogation by the Select Committee on Brexit. As to the future, Davis’s position remains that ‘no deal’ is an option until the point that a deal is agreed. That logic appears undeniable. On the transition period that Philip Hammond termed ‘a wasting asset’, Davis’s position is relatively clear. Essentially he is negotiating not for a transition period, but for an extension to the Article 50 deadline, with the status quo on pretty much all terms (passporting, migration, customs and trade) remaining until 2021. Asked what he would advise an American bank considering a relocation to Frankfurt, Davis’s response was that faced with ‘nugatory expenditure’, he would tell them to ‘save their money for the moment – at least until January’. The implication is that he envisages securing the transition before the year-end, buying more time on existing terms during which all concerned can make better informed decisions.
Bad behaviour At some point in the future AI may replace the heuristics and biases inherent in human decision making. Until then these form an important but often ignored part of market behaviour that doesn’t appear in traditional economics textbooks. A recent report by Fidelity International calls out some of behavioural finance at play within the property industry, which is particular affected due to its inefficiencies. These include: framing (oversimplified groupings or shortcuts, e.g. considering all assets within a sector to have the same risk), anchoring (evaluating one metric through reference to another, e.g. basing the current value on a historic value), loss aversion (assessing the damage of loss as more than the benefit of an equivalent gain, e.g. refusing to crystallise a loss and move on), home bias (favouring familiarity, e.g. weighting a portfolio to familiar assets, rather than those expected to perform best), and herding bias (following the crowd, e.g. buying in a hot market). Understanding these human failings gives us a stronger basis to understand real markets, rather than theoretical ones.
Home run There is a lot of noise in the market around PropTech, and I’m as guilty as anyone of fanning that flame. That’s because the potential impact on processes, roles and more fundamental industry factors is huge. However, understanding which horses to back is as yet obscure. MIT and others have recently published a paper on real estate trends, in which this is discussed. Funding tech start-ups is what’s called a ‘home run game’ by venture capitalists. In other words, of say 10 portfolio businesses, it’s likely that one will succeed big (say 25x equity multiple) and pay for the losses of the others. The challenge for our industry is that with no clear winners to-date it is difficult for property owners and agents to know which ‘real tech’ to adopt. The MIT report suggests that we are in a period of consolidation and M&A, where common standards are likely to emerge. For the moment a watching brief is essential for all involved.
Pas de beurre The unthinkable has happened. France, the spiritual home of baked goods, has run out of butter. The EU abolished milk quotas in 2015, initially prompting a glut of milk on the market which triggered a global price crash. The subsequent slashing of output coincided with a re-emergence of demand upon the news that butter wasn’t so bad for you after all. The result – a paucity of pastries. There are tempting allusions here to other major historical shortages, such as the Great Famine of 1315 (causing millions of deaths across Europe), the Irish Potato Famine of 1845 (decimating the Irish economy), and of course the Great Prosecco Shortage of 2016 (resulting in civil unrest across Essex, and the cancellation of many middle class dinner parties). For those concerned about the coming croissant crisis, there are apparently dairy-free workarounds such as ‘fruit’ and ‘oatmeal’; however neither of these can be recommended.