BR Report 2019

Considerations for investment / Sector focus Considerations for investment / Sector focus 32 33 ENERGY GENERATION Energy is a commodity that we just can’t do without and the UK currently imports over a third of its energy needs 19 . Leaving the EU could remove the UK from the Internal Energy Market, potentially changing the basis on which we import energy from the EU, reducing the efficiency of the system and ultimately leading to higher prices. This is likely to put UK energy providers in a stronger position to make up the UK’s energy shortfall. Any devaluation of the Pound would increase the cost of imported equipment and services, meaning that UK suppliers would be at an additional advantage. You only have to consider offshore wind projects to understand the possible impact this could have: more than 50% of expenditure associated with planning, building and running these UK-based projects is attributed to companies located outside of the UK 20 . According to Vivid Economics’ paper, ‘The impact of Brexit on the UK energy sector’: “Investment needs in the UK’s electricity sector will be higher over the next decade than over the last two decades, due to both capital stock upgrades and the UK’s decarbonisation plans. Coal generation built during the 1960s is reaching the end of its life, with closure accelerated by EU air quality directives, and most of the UK’s fleet of nuclear plant are due to close over the next decade. The low carbon transition is also pushing up investment requirements, as both nuclear and renewable energy are more capital intensive than the fossil fuel plant they replace”. In essence, the government has no choice but to press ahead even in the likely scenario where higher returns are required to compensate investors for the risk of less favourable post-Brexit arrangements. But shifting political priorities make it essential that managers have a detailed understanding of potential legislative changes and how they might affect the UK energy market and energy investments. PROPERTY DEVELOPMENT / REAL ESTATE House building is one of the most sensitive sectors given the impact economic uncertainty has had on house prices and the consumer appetite to spend the money it takes to buy a property 21 . This has impacted building rates, an unwelcome consequence for the UK housing crisis: Government figures show just over 222,000 new homes were delivered in 2017/18, up just 2% on the previous year and well below the government’s promised target of 300,000. The rate of growth for residential construction meanwhile has halved, from 11.9% in 2016/17 to 6.4% in 2017/18 22 . However, while more expensive properties, particularly in the capital, have lost value, there continues to be a consistent undersupply of more affordable homes. There are still areas of opportunity in the regions, with pockets around the country, that have seen a surprising rise in values since June 2016. Larger home builders have not been pulling their weight in terms of meeting targets with the big three of Persimmon, Barratt and Taylor Wimpey each building fewer homes than ten years ago 23 . Research by the Home Builders Federation suggests that, if small builders were given greater support, they could make a big difference to the numbers: returning to the number of home builders operational in 2007 could help boost housing supply by 25,000 homes per year. One of the major issues has been financing. The experiences of lenders in the global financial crash resulted in a drastic change in borrowing available to small builders for funding construction costs. In turn, in just the period 2007-2009, one-third of small companies ceased building homes. But the current demand and the security builders can provide, make this an attractive market for alternative lenders 24 including some BR managers. PROPERTY VALUE MOVEMENTS SINCE JUNE 2016 BREXIT VOTE With interest rates still hovering at very low levels, and overall house price inflation now below annual wage growth 25 , buyer affordability is improving. Despite some hesitancy, in the right areas, home purchasers and investors alike remain interested in the long term security of UK residential property. When it comes to commercial property, underlying sectors are important. High street properties have been under pressure, with the change in consumer buying habits, from trips to the shops to online retailing, needing no help from Brexit chaos to reduce demand. Meanwhile, an ageing population is creating opportunities in retirement housing and healthcare properties and the office landscape is changing, with the influence of US start-up WeWork and flexible working suggesting shifting tenant needs. Again, trends outside geopolitical concerns are important, although Brexit disquiet is likely to affect central London markets, particularly if large companies move to countries within the EU. Areas notable for strong house price growth in the last two years include Leicester, Birmingham, Nottingham, Oxford, Manchester, Edinburgh and Cardiff. SOURCE: ZOOPLA, MARCH 2019 EDINBURGH, 12.6% NEWCASTLE, 5.6% LEEDS, 10.2% SHEFFIELD, 11.4% LEICESTER, 17.2% CAMBRIDGE, 0.6% LONDON, 2.0% PORTSMOUTH, 9.7% BOURNEMOUTH, 10.9% BRISTOL, 9.4% CARDIFF, 12.2% OXFORD, 13% BIRMINGHAM, 15.7% NOTTINGHAM, 13.6% LIVERPOOL, 11.2% MANCHESTER, 16.6% BELFAST, 10.6% GLASGOW, 10.3%