Varecon 01

Ltd

As news broke in June 2016 on the UK’s referendum decision, economists and analysts rushed to downgrade their forecasts. Almost all had been caught unawares, a situation that really would not have occurred if they had been sensing the mood of the country which, at the very least, indicated that the vote was going to be close. Some of the analysts had relied on the betting odds for determining the probability of Remain v Leave, which suggested that the Remain vote would take the day, even though analysis of the numbers indicated flaws in this approach. It was not easy for the It was not easy for the economists to significantly alter their 2016 forecasts after the vote, as about half of the year had already lapsed. Nevertheless, some forecast a recession in the second half of the year, albeit a mild one. More explicitly in terms of the figures, the pessimism focused on 2017.focussed on 2017. The chart below, taken from the consensus forecasts (most recent) compiled by HM Treasury, at each date on the x-axis, shows the results. But what is perhaps more significant than that knee-jerk reaction of the forecasters is the upward trend of the GDP forecast since that date. One might interpret that as an acceptance that the original negativity was a dramatic over-reaction. The preliminary estimate for 2016 GDP growth is 2.0%, so at least the forecasts converged with reality. The equities market analysts had a somewhat similar response to the vote and, although the equities market falls on the two days following the vote were significant (in most of the western-world markets), the UK quickly recovered and – with weakening sterling expected to boost exports – started to perform better than it had in the pre-vote period. The equities market analysts quickly regained their composure, but not without continuing to warn investors that the risks were still firmly on the downside. Property forecasters respond Not to be left out of the action, many or most of the property forecasters also quickly downgraded their forecasts. One of the most important indicators for the tenant market is rental value growth, and the chart below shows the forecasts compiled by Investment Property Forum of forecasts produced by commercial agents, fund managers and others as at the three 2016 dates of the bars. I am only showing the forecasts for City of London offices, as this represents the extreme example. Now, in January 2017, we can try to establish what happened to rental values. According to CBRE Research, prime City rental values rose by 3.8% over the year. Even taking the period since the vote, they fell by only 0.8% over the six months. To be fair, I do need to explain that the property market forecast were expectations for the whole of the City office markets, of investments of institutional quality. The CBRE data refers to the most expensive part of the market, the most prime. It is possible that the whole market underperformed the prime although, if it did, that would not exactly match the rationale of the pessimistic analysts who believed that the banking and financial sector was the most negatively impacted by the vote – and that is the sector typically taking prime space. Indeed, according to JLL, vacancy rates in the City were at 3.9% at the end of the year – an exceptionally low rate – and more-average rental values at £70/sq ft were stable. Not a good reflection on researchers The chart above is of a simple weighted average of forecasters. Although it is not possible to establish, from the published results, the range of the forecasts for City office rental value growth, there are some indications (from the overall office forecasts) that the range could have been quite wide. I am also aware that one or two houses became exceptionally negative as a result of the vote, ludicrously so for 2016 given how slowly things happen in the property market. We may therefore be looking at the weighting effect of a minority of forecasters. But the effect of such messages can, for instance, be seen in the activity in the open-ended funds. Shortly after the vote, a number of these were inundated by investors seeking to redeem their investments. Limited liquidity meant that fund unit prices were reduced (by a combination of down-valuations, fire sales at below valuation prices, and a switch of pricing from ‘offer’ to ‘bid’) to make redemption less attractive and to avoid disadvantaging the remaining investors. In the event, the sales programmes proved short-lived and many transactions did not proceed, as investors had second thoughts and withdrew their redemption notices. Nevertheless, a number of sales did proceed and I am aware that at least one other fund was able to arise capital to acquire these ‘fire-sale’ assets. Now, we hear that at least one open-end fund is suffering too high an influx of capital and is looking to choke this off so as to avoid diluting the performance of existing investors. It seems that investors have become significantly more optimistic. If I had been one of the early fund exiters and had relied on the views expounded by analysts in coming to my sell decision, I would be rather unhappy now.

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