UK real estate needs to take note ahead of inevitable recession

COMMENT: Despite slowing UK GDP growth, Brexit and rising trade war tensions, I have been surprised that neither the government or the Bank of England have admitted that a recession is now a very serious threat. Ever since the recession induced by the global financial crisis ended in 2009, investors have been treated to a stream of forecasts warning that a slump is right around the corner. So far, as we are all aware, none of these predictions have been accurate. Cluttons Investment Management research, which reviews not just real estate data but a series of forward-looking leading economic and financial indicators, suggests this is about to change. Last week global equity markets reacted with heightened volatility to the news that the yield curve had inverted in both the US and the UK. However, the yield curve first inverted in the US on 7 March 2019 and in the UK on 14 August, which is important when analysing when a recession might occur. Ever since the recession in 2009, investors have been treated to a stream of forecasts warning that a slump is right around the corner. So far, as we are all aware, none of these predictions have been accurate. Cluttons Investment Management research, however, suggests this is about to change The slope of the yield curve, which plots interest rates on short and long-term government bonds, has long been considered one of the most reliable barometers of economic health. Research suggests that when the yield curve inverts and stays inverted for 90 days then a recession will occur within 18 months. With the first inversion of the US yield curve back in March, those 90 days passed earlier this month. Apply the same logic to the UK and the likelihood of a recession in the later part of 2019 or early 2020 becomes increasingly likely. The health of the UK’s commercial property market is not only inextricably linked to that of the UK’s economy but to a multi-centric world where global economic well-being is driven by developments in the US, China and Europe. Trade wars between the US and China, and disruption to the EU economy threatened by Brexit, are obvious clear and present dangers. Given the illiquid nature of direct real estate portfolios, advance notice of a downturn in the market can be critical in trying to manage risk and maintain performance. If you believe, as we do, that a downturn in the UK commercial real estate market would be consistent with both the global and domestic macro-economic and market led environment described above then proactive, strategic investment management can position portfolios against potential downside risks. Whether, as an investment manager, you are prepared to heed the warnings, only time will tell. Jamie McCombe is head of Cluttons Investment Management