Investing
WHERE NEXT FOR UK COMMERCIAL PROPERTY?

By Charu Lahiri, Investment Manager at Heartwood Investment Management
UK commercial real estate has seen strong investment volumes over the last few years, totalling £71 million at the end of 2015. Inevitably, we are now at the later stage of the market cycle and growth in total transaction volumes is likely to level off, although market participants continue to expect volumes to stay around 2015 levels for this year.
Nonetheless, investors should reasonably expect lower yields, increased dependence on rental growth to drive returns, marginally increasing supply (in particular areas and/or sectors) and diminishing asset class relative value going forward. It seems a rather dull summation of a sector that has seen very strong growth in the last few years, but nevertheless it should not preclude investors like us from finding opportunities. However, we will need to be more targeted in our exposure.
Where are we targeting exposure?
We continue to prefer prime offices and industrials, though have less conviction 1n the retail sector, which continues to suffer around concerns of “death of the high street”. This has been a long held view, but we are now expecting investors in the UK market to shift their geographic tilt.
Over the last few years, our portfolios have had a strong focus on developers in London and the south east. We still consider that the central London office sector remains a robust market with demand outstripping supply, and these conditions should underpin rental growth, albeit at a slower pace than seen in recent years. However , we are also seeing more investment opportunities in other UK cities, which remain at an earlier stage of the recovery cycle, thus leaving room for both capital growth and higher rental yields.
Increasing investor confidence outside of London
One important driver for UK commercial property in the last few years has been foreign investment flows, where we are now observing shifting trends. Foreign investment has long been a key driver of London/prime real estate markets, hitting a plateau of around 70% of the central London market in 2014/ 15. While this is not expected to drop off materially over 2016 , the global hunt for yield is encouraging international investors into cities like Manchester , Birmingham, Bristol and Leeds.
In 2015, around 35% of transactions outside of London involved foreign buyers compared with the historical average around 15%- 20%. Here again, though, selectivity is key as there is broad dispersion. For example, the take-up of offices in Aberdeen was down 50% relative to 2014 , due to the city’s dependence on the oil sector.
Property remains a core holding
More generally, UK commercial property continues to be attractively priced relative to other asset classes and we still believe it should represent a core part of a multi-asset class portfolio. Both prime and secondary property yield spreads remain elevated relative to ten-year UK conventional Gilts and UK corporate bonds versus their historical averages.
Understandably, there are concerns about the UK economic outlook and the impact this may have for the UK property market. Export activity has languished in response to global factors and business investment has slowed, which is not being helped by Brexit concerns. These are all headwinds, but they should be countered by reasonably firm levels of private consumption. We continue to believe that UK economic fundamentals are sound, which in turn should support occupier demand.
How are we positioning portfolios?
UK commercial property remains a core allocation within our portfolios. However, following strong performance in recent years, we are looking to reduce some of our allocation to more volatile, equity-like instruments, such as developers, which have a higher exposure to retail, as well as London and the south east. Our preference is to have a targeted exposure to those sectors that we believe are best positioned for growth – prime offices, industrials and select opportunities in regional UK cities.
Investing
Not company earnings, not data but vaccines now steering investor sentiment

By Marc Jones and Dhara Ranasinghe
LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.
Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.
Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.
“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.
“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”
The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.
Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.
But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.
(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)
SHOT IN THE ARM
Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.
Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.
Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.
“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.
The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.
Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.
“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”
The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.
Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.
Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.
Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.
“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”
(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)
(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)
Investing
BlackRock to add bitcoin as eligible investment to two funds

By David Randall
(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.
The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.
The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.
A BlackRock representative declined to comment beyond the filings when contacted by Reuters.
Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.
Bitcoin tumbled 10.6% in midday U.S. trading Thursday.
Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.
“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”
There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.
BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)
(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)
Investing
Bitcoin slumps 10% as pullback from record continues

LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.
The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.
Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.
(Reporting by Julien Ponthus; editing by Tom Wilson)