Brexit and Investment- Change is the Driver

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As we head into a period of change, Investment and RE Deal Flow will rely on confidence but also on change.

Have you ever performed live? In sport? In music? On stage?

 Picture the scene- it’s a Sunday morning football, it’s rained all night, you’re playing away from home. You have no idea of the opposition nor the playing conditions.

 As you arrive, you look at the weather and groan, at the size of the opposition and feel weak, at the vocality of the support and feel intimidated.

 The weak person makes note of all of the mitigation and excuses themselves. They store it in their mind to use and blame. They look for others to do their job and they shirk responsibility.

 The strong person realises that the conditions are difficult but understands that they’re the same for all involved. They realise they need to adapt, but with intellect and decision. They look to use agility and strength of offering to win.

 As Brexit approaches, we know nothing of our playing conditions; we are unsure of the strength of the opposition and we are deafened and intimidated by the voices on both sides of the debate. Uncertainty is the one thing we are sure of.

 So, we need to ask ourselves how do we respond to market conditions? What are the new problems that need to be solved? What businesses are not just recession-proof but fare better during times of difficulty and depression?

Winners and losers

Yes, there will be losers from Brexit, possibly including financial services firms that rely on passporting rights into the European market.

But there will be winners as well, such as the nimble and fleet-footed smaller businesses that will be the backbone of the post-Brexit economy. For them, Brexit is likely to prove somewhere between irrelevant and genuinely positive.

The right types of business

A degree of positivity permeates deals seeking financing, such as through some of the specialist REITS

Investment trusts can be a great way of investing in property, given the relative illiquidity of property as an asset class and the long-term time horizons it entails. That's why real estate investment trusts (REITs) have flourished since their introduction to the UK market in 2007.But not all REITs are equal. Given the opportunities for active asset management that commercial property affords, we believe that specialist REITs can offer considerable attractions over generalist, benchmark-constrained REITs.

Commercial property is a diverse asset class. Accordingly, its component sub-sectors will often diverge widely from each other in their performance and prospects. At any given time, certain areas will languish while others flourish. But REITs that follow a standard property benchmark will be shackled to the languishing parts of the market rather than focusing on the flourishing ones. Specialist REITs, on the other hand, have no such constraints. This means that they can focus on the areas where the managers believe valuations are most attractive and prospects are brightest.

This is especially important with UK REITs because of London's inevitable dominance of benchmark indices. For example, following a standard property benchmark means accepting high exposure to the London office sector. But this is an area that faces less certain prospects in the run-up to Brexit. Meanwhile, conventional high-street retail also looks unattractive as it wilts in the face of online competition. And while big logistics warehouses have done well in the past, they now look distinctly overvalued.

In addition we know that reforms to EIS and SEIS in Chancellor Philip Hammond’s Autumn 2017 Budget cleared out the structured tax avoidance schemes that had previously taken advantage of tax efficiencies and helped the two schemes to metamorphose into vehicles for proper venture investment.

As a simple example, the film industry often witnesses a boost in ticket sales during a recession box office sales were up by double digits during the 2009 recession and continue to climb; this could be down to people’s need for distraction and suggests perhaps a night at the movies offers a chance to get out of the house and be wrapped up in someone else’s drama for a few hours, all at a relatively low price? The reason is subservient to the trend, but the trend is significant and not to be ignored.

These are the type of specialist arenas that growing businesses offer the sort of opportunities to investors that will appear increasingly attractive in the post-Brexit climate. These are the types of firms that are well-placed to flourish after Brexit, for a number of reasons.

·      They tend to operate in very specific areas of activity, quite often specialising in their niche. That gives some protection against any adverse Brexit.

·      They are agile and able to adapt quickly, in contrast to corporate giants, thus offering a real disruptive challenge.

·      On a similar theme, smaller firms can transform themselves much more quickly than larger businesses, should circumstances demand it. If there are problems selling the type of widget currently emerging from their workshop, they can start producing a different type without too much trouble.

·      Innovation; the UK rarely follows. We innovate, invent and design and have done so throughout history.

It’s exactly this agility, cultural innovation, desire to think beyond geographical borders and an ability to grow projects that unite rather than divide people, that has the potential to give the investment stability and growth we are all so desperately searching for at this time.

 Just like that murky Sunday morning football match, the weak and irresponsible will seek excuses and will wither whilst the strong, intelligent and agile will survive.

 Which one are you?

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