Douglas & Gordon Asset Management Explain Why PCL Will Double in 10 Years

Thursday, October 30, 2014 | by Douglas And Gordon

FORECAST: PCL values to double over the next ten years – D&G

There’s value in prime central London’s £2m-£4m bracket if you take a longer term view, says D&G Asset Management.

Screen Shot 2014-10-17 at 08.57.25Douglas & Gordon’s fund and asset management arm has been gazing ahead to make an educated guess as to what London’s resi landscape will look like in ten years’ time. And it’s come up with a pretty rosy picture, forecasting that PCL values will double in the coming decade.

“Global demand will remain strong” for an AAA rated UK, says the firm, “especially for PCL real estate assets.” This, mainly, because resi investments are essentially “a bet on demographics.”

Monetary policy is likely to stay loose over the next decade as “developed world economies are miles away from being in a fully recovered state”. This will continue to drive asset prices up, while the much-discussed policy risks to £2m+ homes will probably lift after 2015’s Election, argues D&G. Whatsmore, interest rates “will stay lower for longer than the market currently predicts”. That being said, there are some turgid spots in the market ahead: “Prices on some new build stock look vulnerable particularly as some major UK lenders have tougher LTVs and covenants on new build to secondary stock.”

Rents for properties in the £1m-4m range in the Golden Postcodes  are set to rise in line with the Retail Price Index, the firm thinks, but will under perform capital rises; gross yields are likely to fall below 1%.

Here’s some background to D&G Asset Management’s predictions:

Since 2008/09 there has been a combination of economic and financial conditions that have favoured the owners of assets.

The hope of the central banks is that as asset prices rise so balance sheets will get restored, confidence will return, jobs get created and wages rise.

These are financial conditions that will lead to the continued rise in capital value of AAA assets and, especially, those assets that the wealthy want to own to preserve their wealth.

Very loose monetary policy will only end and/or the selling of the bonds acquired under QE (meaning a rise in yields and a tightening of policy) only start when the underlying real (as opposed to financial) economies of the USA, the UK and Japan have demonstrably and clearly recovered. We think that these developed world economies are miles away from being in a fully recovered state.

We would argue that residential property is, in the end, a bet on demographics.

The Governor of the Bank of England has made it quite clear that UK monetary policy will not be determined by what happens within the Central London economy; the “right” Bank of England UK interest rate will almost always be the “wrong” (i.e. too low and thus inflationary) interest rate for Inner London.

Low inflation/wage growth and future fiscal tightening will keep a lid on UK interest rates.

Our view is that due to further fiscal tightening for the next five years at least, the global deflationary environment, little pricing power amongst UK retailers and very weak real wage increases, UK rates will stay lower for longer than the market currently predicts.

  • After 2016 annual real reductions in government spending are set to increase from current 2.3% p/a to 3.7% p/a.
  • Between 2007 and 2013 only 4.4% of the £80 billion of write-offs by UK banks and building societies was on loans to individuals secured on their houses accordingly, those domestic banks, re-entering the UK mortgage market, are likely to want to lend on London residential property above all other regions.
  • London has a current account surplus of 8% of its GDP, the sixth largest in the World.
  • London has more people (1.5m) employed in highly skilled sectors than any other city in the World, NYC (1.2m) –source Deloittes
  • 300,000 further jobs in these sectors forecast to be created in London by 2020 –source ibid
  • London’s share of nation output has risen every year since 2006 and is now 22.4%
  • London has more world class universities in the top 40 than any other city in the world
  • London takes 45% of all UK Foreign direct investment –source: Ernst and Young 2012