Cognitive fog
Noise, perhaps a sonic attack, was thought to have created the mysterious Havana Syndrome, named after the Cuban capital where CIA officers and State Department employees reported experiencing strange sensations of sound and pressure in their heads. As a result, many experienced “cognitive fog”.
Investors, it could be argued, are currently experiencing their own sonic attack from the sheer pace of change. One recent example has been the chief executive of tobacco business Philip Morris calling on the UK government to ban cigarettes within a decade in a move that would outlaw its own Marlboro brand. This from an industry when confronted by indisputable research into smoking’s deleterious health affects in the 1950’s devised “doubt is our product”. The more spurious research they promulgated the more likely consumers would ultimately question the research. More recently Steve Bannon’s public relations strategy personified this, in his choice words to “flood the zone with shit” as (mis)information overload makes us question everything.
To avoid suffering from cognitive fog, investors have to filter out the noise from the signal to find value in the market and some private equity firms are seeing through the fog in the UK. There have been 13 take privates this year (€31.5 billion in value) in the UK alone compared to 20 in the States, a much larger market. AustralianSuper for instance plans to increase the number of staff in its London office from 38 to 90 by the end of 2023, as it targets international expansion as deals are looking more attractive offshore.
BTR/Multifamily (surely these terms should be indivisible rather than interchangeable by now) is a collective investment strategy for equity investors. The value of UK housing is in excess of ￡7 trillion and it grows by around 1% per annum, house building is profitable and profit margins robust, and coupled with the UK populations unyielding growth since the 1980s means lending to the sector is attractive as ICG notes. Other lenders, whilst vocal advocates of the sector, are still only tepidly lending however. Wall Street firms are more eager than ever to buy family homes. Blackstone’s real-estate investment trust bought a portfolio of apartments for $5.1 billion from insurer AIG, and ConduitRE in its more minor capacity are working on a number of residential investment financings in the UK and Europe for similarly global funds.
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Although rented homes are becoming a hot trade among big investors, the trend isn’t new. Blackstone made lucrative bets on foreclosed houses in the aftermath of the 2008-09 downturn. And there isn’t evidence yet that institutional investors are crowding out average home buyers. They bought just one in 500 U.S. homes sold in the 12 months after the Covid-19 crisis began, according to Amherst Capital. However, big investors’ activity will increase now that the pandemic has made owning family homes more attractive. While the rents collected from commercial real-estate assets such as malls and offices took a hit during the Covid-19 crisis, most private residential tenants continued to pay up. Family homes could be an even better long-term bet than owning e-commerce warehouses.
Real-estate research firm Green Street estimates that renting out U.S. single-family homes will deliver annual returns of 6.6% versus a forecast of 6.3% for industrial property. Buying up homes solves several headaches for global investors. Housing is a large asset class so can mop up a lot of excess cash. The submarket for rented single-family homes alone is worth approximately $3.1 trillion in the U.S., according to Amherst:40% larger than the value of all U.S. offices and more than triple the value of all the country’s hotels. Renting out homes is also a good hedge against inflation, although PIMCO did recently warn of inflationary pressures from housing rental costs that could push interest rates higher (rent is a key input used for calculating the US CPI). Over the past four years, according to data from Colliers, rents have increased by 15% on average across Europe.
In retail the inflection point must be close as yields rise and rents drop. Ian Hawksworth of Capco is certainly hopeful of a turning point remarking that there are "elevated levels of enquiries, strong transactional activity and improving sentiment indicate that the worst… may be behind us".
Macquarie noted in a recent report that industrial demand and rental growth have historically been highly sensitive to economic cycles and swings in global trade. This includes the 1990s recession, the 2001 dot-com bust, and the 2008/09 GFC during which net absorption of industrial space turned negative as GDP declined and employment contracted. The Covid-19 crisis has changed all that. Segro is now the third largest REIT in Europe, eclipsing major metropolitan landlords. Beyond the fog lies clarity someone once said.