Politics and risk aversion

The slowly grinding gears of democratic institutions in Brussels, London, and Washington DC will be put under great pressure over the next few months. An investor’s natural reaction to this uncertainty is anxiety and a flight to quality, which increasingly means low or negative interest rates in return for the security of sovereign debt. Investors will also have one eye trained on any response by other institutions, such as the Federal Reserve, the HKMA, and the Bank of England. These institutions, along with the European Central Bank, have recently employed strong stimulus measures designed to keep liquidity levels high. Whether Central Banks can use their influence to shake major economies out of secular stagnation remains to be seen. The next major tests will be the EU Council Summit on October 17th, the Brexit deadline of October 31st, and the formal inquiry in the US House of Representatives of President Trump.

October 1 represents the 70th Anniversary of the founding of the People’s Republic of China. Hong Kong democracy protesters are also competing for the world’s attention during this historic event. Another institution that struggles to remain relevant is the United Nations. It was rebuked last month by 16-year-old environmental activist Greta Thunberg. The International Youth Climate Movement is raising the social consciousness of governments and corporations, including companies wishing to employ young talent and retailers that wish to sell to them.

The global real estate industry has a major part to play in this unfolding story. Real estate owners are responding to requests from tenants, investors and regulators to improve sustainable practices for construction and building operations—but the speed of this response varies greatly. While the direction of travel toward sustainable practices is unmistakable, the Global Climate Strike could certainly accelerate the attention that building owners pay to a wide range of ESG issues.

Here are some of the other trends we are watching closely:

• Retail values continue to plummet in the UK, an e-commerce-friendly market that is also a victim of tenant-friendly insolvency practices and legislation. Contrarian investors are circling the forced sellers which will emerge over the next six months as lenders enforce covenants. However, only the best stock will likely recover its value in an oversupplied market. Investors in other countries are watching the UK closely, as sentiment for retail properties turns sharply negative. The recent bankruptcy of Forever 21 shows that the US is hardly immune from retail disruption.
• Office landlords in New York, London, Chicago, and other gateway cities hold their breath as Adam Neumann’s exit adds to WeWork’s troubles. Ripple effects will likely affect the pace of leasing by WeWork and other operators (Knotel, Industrious, IWG) in the near term. Our view is that a positive long-term future for flexible offices and co-working remains intact, but the financial health of operators will remain a concern.