In November UK economic output declined by 0.4% and year-on-year GDP growth decreased to just 0.5%; the lowest level since June 2012. IHS Market/CIPS survey data suggests that the economy again stagnated in December but hinted at an improvement inconfidence post election.
Sterling rose 1% in December but fell back by the same figure in January. This is in the context of a 15% fall in the value of sterling since the middle of 2015 when the prospect of a Brexit referendum first appeared. Any other data to support an immediate improvement inconditions is so far strictly limited.
If global growth fails to stabilise, or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. Expectations of a 25bp loosening in February or May are now gaining traction.
Weak consumer spending and passive business investment now require increased Government spending.
Regional economic imbalances have become entrenched in the UK. Five of the 10 largest concentrations of high growth industrial activity are located in London. And more than 50% of the largest concentrations in the same activities outside London are located in the South East.
Manufacturing grew by 2.5% in the 3-years to y/e 2018 compared to all UK economic growth of 5.4%. Only one South East location is contained in a list of the locations with the largest concentrations of manufacturing activity.
The property initial/gilt yield gap is currently 4.24%. Overall, this should be supportive of UK real estate asset prices.
There are clear signs that the direction of travel for retail assets on the one hand, and office and industrial assets on the other, is diverging further. All property capital values decreased by a further -1.% in Q4 2019 as retail capital values fell by -4.4%. But office capital values rose by 0.3% and industrial values increased by 0.7%.
We expect weak property market conditions to continue into 2020 but stabilise in the last two years of the forecast period. As the relatively poor numbers of 2019 drop out, our forecast has increased from an average annualised total return of 3% to 5%.
Portfolios which are under-weight to retail will out-perform and UK real estate, with a yield of 5% and a 420bp premium to the risk-free rate, continues to be an attractive investment proposition by comparison to by comparison toother asset classes.