In this week's blog, we tackle the growing media narrative around the performance of British businesses and capital inflows, looking ahead to what could be a European real estate revival as we approach what could be the top of the market for rates.
The FTSE-100 underperforming has been a topic of debate for some time now, namely because many link this directly with the Brexit referendum, and that did play its part; however there are more complex reasons afoot here, companies have been choosing to centre themselves in the US since the Regan-omics era of deficit spending, placing yourself in the US has always given you instant access to a ready-made plethora of trade agreements, a culture of innovation, and an affordable labour market. With a tax system set up on a state-by-state basis, regions needing to increase jobs and productivity have a lure free from independent of central oversite to bring fledgling businesses in, and that creates growth.
Businesses and investments suffer from uncertainty, and one of the issues since Brexit as we know is that the ready-made package of tariffs and agreements that took decades to put together was removed without an alternative in place, so even though in the last 10 years we have seen a 23% growth in the FTSE-100 as a comparable, the S&P grew 246%. Imagine it's like being at a party; we have had a few nibbles and drinks and some karaoke; very pleasant, yet the neighbours have had a suburban Rio Carnival, a very different and memorable experience.
One issue in the debate currently is that even though there has been modest growth in the value of British businesses recently, the inflows to create a comparable market with the US will never come in until some of our economic infrastructure issues are solved. However, we may see an independent narrative playing out in Real Estate. Savills, a commentator whom we very much respect and frequently quote, has highlighted the fact that they are seeing a renewed interest in foreign investment inflow coming into our housing market, driven ultimately by an anticipated fall in interest rates leading to economic revival. The markets reflect that this isn't imminent; the UK 10-year swap rates have been tracking upward since January 2024, and there has been no indication from the Bank of England that we are in a position yet for cuts, but these kinds of investments are very much viewed on wider time horizon, and how the economy will be looking in 2025 and beyond.
Ultimately, as we have touched on before, in capital markets, it's when you buy, not necessarily what you buy, that ultimately counts, and there are flashing indicators that many are seeing this as the bottom of the market. The research from Savills indicated that U.S., Japanese, and Taiwanese investors could force a 20% resurgence in Real Estate acquisition, and in an environment where supply is outstripped by demand to this extent, those kinds of inflows move markets and prices.
In any kind of value play, the very basic and first question investors ask themselves is what's discount, and what's repriced for a reason. Have the fundamentals changed, or have circumstances changed? Discounted opportunities where the fundamentals of demand haven't changed, tend to move incredibly quickly when capital comes in, and Knight Frank is currently estimating that we could see over $13 Billion in capital inflow from the US alone between now and 2026, which would make the UK Real Estate market one of the biggest beneficiaries of international investment capital compared to our European Rivals.
So, with all these positive indicators flashing, how does that translate to our market? Quite simply, investing in the UK SME Development sector follows the same logical path when making an investment decision: it's massively undervalued simply because demand can never be met, and the product is essential, it's a market that has been circumstantially repriced, and investment instruments such as P2P will allow people to tap into that opportunity.
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