BREXIT
Three points to set the scene:
Firstly, and most importantly when unexpected events occur, there should be no rush into making decisions that do not need to be urgently made. Further, let’s be aware of those responding to sentiment swings as an immediate reaction to a surprise such as this Brexit vote, as their decisions are unlikely to be based on well informed and considered judgement and we all need time to listen, watch, consult and contemplate. Having said that, some of us had prepared, at least to some extent, for this potential outcome so hopefully that reduces or eliminates any need for any immediacy on their/our part.
Secondly, the UK has just taken a step into the unknown so there is no one (at all) who is able to guide us as to what ‘will’ happen now. Instead it is about listening to those who have an informed opinion and impartial perspective on what is ‘likely’ to happen – and then formulating a view of your own on which your decisions will need to be made.
Thirdly, from a Moorfield platform perspective, we are in strong financial health (best ever at present) and we are UK specialists without pan-European exposure – see below for further comment as to why I believe this is relevant and positive. We have: (i) realised the entirety of MREF and MREFII so all asset and financial risks have been eliminated; (ii) ensured MAREF has secure equity and debt finance in place and a pool of un-invested capital, and; (iii) we have only invested c.50% of MREFIII so this has material cash resources and will be able to take advantage (when appropriate) of real estate market opportunities. Additionally, our current focus in MREFIII (and of course MAREF) is on the Alternative real estate asset classes and, in my opinion, these are likely to be the most stable from both an economic and demographic perspective over the next few years.
The Basics:
The UK public has voted to leave the EU by a c. 52:48 ratio on a c.72% turn-out.
The UK Prime Minister, David Cameron, has resigned effective from the Conservative Party Conference in October 2016. We don’t yet know what will happen with the Chancellor George Osborne.
It is predicted that on resignation and newly elected PM, Article 50 of the Lisbon Treaty (2009) will be invoked and this will begin the process of a two year period of negotiated exit (this period can be extended by unanimous consent). It has also been suggested that there may be 12-18 months of preliminary discussion prior to Article 50 being invoked to pave the way for a more orderly departure. So 2019/20 for UK exit.
It is unlikely that an ‘EU-lite’ relationship results (i.e. Norway) due to the strong resistance to free movement of people and EU budget participation. Instead it is likely to a more complex one based on a ‘free trade treaty’ such as that between the EU and Canada. But at least Canada has set some parameters to help guide us!
Scotland voted 62% remain and 38% leave and so will now be considering/preparing another independence referendum (predicted within 2 years). Currently the general opinion is that the independence camp will win. One of the many issues to be addressed by the First Minister of Scotland (Nicola Sturgeon) will be the economic viability of independence as since the last referendum vote the oil price volatility has reminded everyone of Scotland’s financial fragility and hence reliance on Westminster (i.e. UK parliament). There is also the likelihood and/or appeal of membership to the EU – and of course all those other ‘pros and cons’ from last time that have not gone away.
Northern Ireland through Sinn Fein have already started talking of reunification with the Republic of Ireland.
Whether positive of negative for the UK in the medium/long term there will be short term uncertainty and volatility in most areas of the economy and this is not good for any of the markets. Sterling is likely to be very weak and there will no doubt be talk of a recession. Sterling weakness leading to a potential pick-up in export led inflation will be unlikely to lead to interest rate rises whilst the BoE is considering how to tackle concerns over economic growth, employment and consumer confidence. Perhaps an interest rate cut is more likely? Of course, lower growth projections are already flooding in.
Moorfield views and its intentions:
David Cameron will hand over to a new Prime Minister at the Conservative Party conference in October 2016. This will likely be his final act as UK PM with his interim role principally being to stabilise markets and manage political manoeuvring and division within the Conservative party. In the Labour party there will also be significant unrest and likely leadership challenges. Both David Cameron and Mark Carney (alongside the leave campaign leaders) will have to find credible and comforting words about the strength of the UK economy, together with ongoing banking liquidity and stability, as there is little more that they can do in the short term. Those who predicted disorder and economic unrest resulting from a Brexit (i.e. Bremain camp) will now have the job of ensuring that this does not happen – in part working to disprove their own thesis.
Unquestionably difficult and unpredictable times ahead and I intend to write again when the dust has settled. For now I would say that limited action is the best way forward for Moorfield as we have a well-funded GP and cash resource in both our active funds (MAREF & MREFIII). We have not invested any material capital in 2016 but do have a number of investment opportunities sitting with Brexit clauses – which we will now revisit. I don’t believe a lot of buying opportunities will result in the short term but I do think that some interesting opportunities will arise in 2017 onwards. Moorfield also remains predominantly focused on Alternative real estate investment opportunities where the demographics are more value and income protective through the economic cycle.
In the past I have expressed my concerns over the future political, economic/fiscal and cultural structure of Europe and hence the risk of investing there (and especially in the Eurozone) and although we regularly revisit our strategy we have always decided to stay UK focused. I believe there is now more reason than ever for this to be the case and here are a few of the reasons:
The Eurozone is a failed experiment and everyone knows it – so how is it going to be corrected?
Europe currently has more political and economic division than at any time since WWII, in my opinion – and it is not close to being resolved.
Polls suggest (if you chose to take any notice of them) that other EU countries would also vote for independence given the chance – so what does the future hold in this regard? Could independence from the EU go viral?
What does all this mean for the euro? It would not be the first time that smart people make good asset investment decisions but make the wrong currency call.
Despite the current events, in the medium term the UK is economically sound, politically stable and has its own central bank and currency. The language, time zones and law assists the highly regulated and professional sectors to make the UK a safe haven for global capital. This, in my opinion is unlikely to change. In fact, independence in a fractious and unstable Europe could prove very positive.
I think real estate capital values will fall in the short term, rents will also stop growing and asset management initiatives will prove more difficult. Income and banking terms (LTV and ICR and cure rights etc) will be very important in every real estate investment.
Conclusion:
I am disappointed with the outcome of the referendum but I am very pleased Moorfield determined to stop investing and hold cash in case Brexit occurred, and also that our focus is UK and Alternative sectors. It does not mean we are immune to the pain on some of our Traditional investments but they are all manageable issues until markets get some clarification and direction, afterwhich I believe they will perform well.
I hope the above is of value – more from me over the next few weeks.
Best regards
Marc