Are we out of recession and is opportunity knocking?

Yesterday I attended the St Bride’s Managers update at The Magic Circle in London. Was the magic Circle coincidence or a reflection that we need some magic to turn things around?

My takeaways were as follows and show that there are so many moving parts in modern economies that it is often challenging to align them all to reach a clear view.

Some of the more concerning issues (Bad News) that the UK economy face include:

• Public debt +15% on last year
• Government spending +4% higher on last year
• Population – up by 800,000 last year and forecast to grow by 500,000 every year for the next 20 years!!
• Personal debt up £100,000 on last year, which is not significant BUT is when you look at the impact that a rise in interest rates will have. Consumers are not currently paying off their debt as they were back in 2009/10.
• Housing – shortage of more than 100,000 homes. Resolution of this number is being heavily impacted by the issues that exist within planning.

Good News has come with the following;

• Unemployment has reduced from 7.8% to 6.8%. This equates to 2.2m unemployed people. Of note as well is that the improvement is not all full time and that whilst employment is up wage rises have not started to happen as yet, which maintains a hold on consumer spend.
• Property debt – this has reduced to £176bn from £198bn.

Robert Houston made a very interesting ‘structural’ point about the accuracy of valuations and summed the current system as ‘nonsense’ with Specsavers benefitting from selling ‘a lot of rose stinted glasses’. So is it all about denialism?

Much of the investment talk in the property market is predicated on rental growth but of note to me is that for retail it is still very much in negative territory overall but not as bad as it was in 2009 so that is progress of sorts. Polarisation continues to abound, as the IPF forecast for 2014-18 is +2.4%. The London and South East bubbles continues to grow as reflected by a recent deal on Albemarle Street in London where the yield is a mere 1.2% but with rental growth will push this up to 3%.

So overall we can see growing demand from a growing population but this is not going to deliver the increase in spend that everyone might hope as three distinct groups exist – the rich who are getting richer, the squeezed middle and the stagnant low income groups. What was shown in the presenations though is that the growth of this population will primarily be in cities both from incomers but also a growth in the movement of retirees towards urban locations where their family and key services are more likely to exist.

So does this mean greater urbanization as if it does then this is very good news for many UK towns and cities who have plenty of empty property that can be changed to accommodate these people as well as provide the services and offices/factories for them to work in. If this is the case then we have a massive challenge on our hands and that is why talk of new garden cities is significant but what of the cities and towns we have where there are hundreds of empty premises ripe for reuse? Will planning allow this? Will it financially benefit the landlords as if not why would they want to do it? Is there an overall awareness of these population changes and what government needs to do to service it? Workers place more demands than ever on their employees and also where they live and what they expect from both their employer and living environment. There is much more one can write on this but the key points for me are that there are great opportunities for all;

• Increasing demand is good for retailers and with some wage growth it will be even better
• Congestion is a big issue in large cities (Manchester and London two of the biggest) and as such if we can spread opportunity through employment and housing to less congested areas then people and services will benefit
• Massive opportunities exist in these ‘other’ locations who have stock and often people from their industrial heritage

So there is much to play for with all these changes taking place but both local authorities and investors need to know exactly where and when the opportunity is ripe! Knowledge is power in this process!