Reconsiderations, rejections and reproduction

21 March 2019

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A personal view of the evolving role of real estate in a world of technological, social and business change, by Richard Pickering, Head of Futures Strategy.

Reconsiderations, rejections and reproduction

Three votesPass this deal, or Brexit could be lost’, warned Theresa May prior to yesterday’s vote. An insufficient amount of those on the Leave favouring side of her party believed her, and so the vote was lost (by 149), but not yet Brexit. A decision this evening could lead the UK down a no-deal path (and an associated zero rated tariff on 87% of imports revealed this morning), but without tempting fate that also seems unlikely (in fact, the bookies have shorter odds on a second referendum). More likely, MPs will vote tomorrow for an extension to Article 50. Whether this will achieve more than kicking a well-beaten can down the track remains to be seen. The EU will be seeking reassurances around what the UK will do with this extension. In the absence of some significant innovation on a deal, the binary position of no deal or no Brexit following the delay feels more pronounced. The EU believes that the risk of a no-deal divorce has never been higher. On the other hand, the PM is increasingly pointing to the prospect of a second referendum; now also a part of Labour policy. If that were to happen, the odds are stacking increasingly in favour of Remain. On the back of this heightened uncertainty, sterling has been jittery all week. The croakiness of Theresa May’s voice last night betrayed similar nerves – she appears to have run out of cards to play.

Investment 101 As we approach a pivotal point of uncertainty in the UK economy, the gap of knowledge around economic forecasts is increasing, with many commentators now choosing to present scenarios rather than median forecasts. Many markets including real estate are correlated with economic performance, but over time correlations can change, which increases error in predicting the future. For instance, until this century, bonds had a positive correlation with equities, but more recently that relationship has been negative. A refreshing dose of reality is provided by Warren Buffet in his recent annual letter to shareholders. In this, one of the world’s most successful investors admits: ‘I have no idea as to how stocks will behave this year or next year’. Instead, he states: ‘Our thinking rather is focussed on calculating whether a portion of an attractive business is worth more than its market price.’ On top of this, he cites diversification within a single corporate structure, low overhead costs and a prudent approach to debt (as opposed to a ‘usually win, occasionally die’approach, which ‘makes sense when you share the upside, but don’t suffer the downside’).

Model 3, Take 2 An interesting public conversation on the importance of retail real estate has played out this week in Tesla’s recent statements about its stores. Cars are not typically sold on the high street, and Tesla’s foray into traditional retail has served as a poster child for a new breed of showrooms. Hence, when Elon Musk announced a couple of weeks ago that it was closing all its dealerships in favour of a pure pay online model, a few hackles might have been raised. The move was thought to elicit a 6% reduction in the cost of production of the new lower-priced Model 3 - a not insignificant saving. Given that Tesla’s target segment is the tech savvy early adopters that are comfortable buying online and are well exposed to the brand, this felt like a justifiable move. However, in a reversal of position, this week Tesla has announced that it will not be shutting the stores, but instead increasing the product price by about 3%. The manufacturer is understood to have considered that the revenue loss from store closures would outweigh the cost savings. This feels like a significant inference on the value of the physical store to a business that on the face of it might not need one. In all Tesla stores the transaction (and the majority of the fulfilment) is still carried out online, with sales staff directing customers to the website. Hence the purpose of the store remains in customer engagement.

Grocery and growing The grocery market is a challenging one. In the UK the market is relatively concentrated, with a handful of dominant players, significant barriers to entry and significant operator bargaining power. In spite of this, margins tend to be thin (typically <2%). To date it has suffered relatively limited digital disruption, with online grocery sales still languishing around 6%, compared with a figure closer to 20% for all goods. However, this week, the Wall Street Journal reports Amazon’s intention to push on with the roll out of a grocery format in the US (not Whole Foods), and The Telegraph reports that the e-commerce giant is staffing up in the UK ahead of a similar roll out. US supermarket stocks were forced down as a consequence, and will face pressure to innovate. An example of innovation in the sector comes in reports this week that Waitrose is planning to install pick-your-own urban allotments in its stores using aeroponic feeding systems. This plays to Waitrose’s premium customer segment, who are prepared to pay for provenance; whereas operators trading at a lower price point might feel more of a pinch from Amazon.

What’s in a name? Apologies for having skipped the publication of the Futures /Cut over the past couple of weeks. I have been doing my bit to address the UK’s declining fertility rate (1.76) in the form of the birth of my daughter. After some contemplation Miss P. has been given an ‘unusual’ name (#1,681 in the popularity index). I was one of three Richards in my class at school and didn’t want to risk a similar fate. However, the data shows that unusual names are becoming less, well... unusual. Pre-industrial revolution, there was relatively little heterogeneity in given names, with the significant majority of people being given one of the top 10 (typically named after wealthy people with which an association was sought). Nowadays, only 13% of names are in the top 10. The evidence also shows that naming becomes more traditional during times of economic stagnation, and more sporty when the economy is performing well. With regard to the declining fertility rate, Brexit offers some positive news. Bookies are now placing odds at 3/1 that Britain will run out of contraceptives prior to the end of 2019. Watch out for a corresponding birth spike in 2020, but hopefully not a return to Richards.

Links to referenced reports can found on our website under 'Snippets'. Take a look here.

© Cushman & Wakefield 2018. This information contained in this briefing is for information purposes only. Accordingly, the information contained herein should not be relied upon or used as a basis for any business decision. Any such decision should be based only on suitable and specific professional advice. This briefing is not directed to, or intended for distribution or use in, any jurisdiction where such distribution or use would be prohibited. To the extent permitted by law, Cushman & Wakefield accepts no duty of care and cannot be held responsible or liable for any loss or damages which may be incurred by any person (directly or indirectly) as a consequence of relying or otherwise acting on the information contained in this briefing.

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