Knight Frank reports strong performance in uncertain markets

Posted by Knight Frank Newcastle on 21st October 2019 -

Results for the year ended 31 March 2019

• Group turnover down 2% to £517.4m (2018: £525.9m)

• Group profit before tax down 11% to £148.4m (2018: £166.7m)

• Strong balance sheet with net assets at £260.8m (2018: £262.9m)

Global coverage

We now have more than 19,000 people (up 5%) across over 500 owned and associated offices in 60 territories.

Results overview

Alistair Elliott, senior partner and group chairman commented: “Coming off the back of a record year, we are very encouraged by our performance in 2019.  We experienced widespread political and economic uncertainty that resulted in a slowing in transactional activity across many of our principal markets.  We are continuing to invest heavily in our future with a focus on developing our digital capabilities, expanding our global platform and improving the environmental and working efficiency of our offices around the world.  We are particularly pleased that our margin has remained very strong at 29% whilst absorbing the cost of these investments. We are committed to our independence and remain debt free.  

“In the UK, our capital markets, valuations and residential lettings teams excelled and our regional commercial offices continued to perform very strongly.  We also saw improvements in London residential sales, despite the difficult market conditions.  Knight Frank Investment Management (KFIM) had another record year and its investment performance, as independently measured by MSCI, continues to out-perform the various peer benchmarks. Assets under management grew by nearly 30% to £2.98bn and, in line with a long-term strategic ambition to extend the business into Continental Europe, KFIM is now active in a number of European locations, including France, Spain, Germany and Central Europe.   

“Our Continental Europe and MEA regions were generally stable with a record performance from our Berlin office and double-digit growth in Abu Dhabi and Dubai.  Asia Pacific proved more challenging with the US China trade tensions affecting a number of territories.  Nonetheless, Indonesia, Malaysia, Singapore and Thailand all delivered record performances, reflecting the increasing breadth of our capability in those countries, which have been built on consultancy and valuation capabilities.  

“We continue to pursue a heavily transactional-based model across our group, backed by very strong advisory and consultancy capabilities, making us more sensitive to challenging trading markets around the world.  We have great confidence that, as soon as a sense of political clarity and stability returns, we will see a marked improvement in real estate trading volumes, as pent-up investment and private demand returns to the markets.  We also see immediate opportunities presented by emerging markets, senior living, healthcare and private rental sectors and are growing our capabilities in these areas. 

“We are committed to growing our businesses around the world organically, coupled with the establishment of best-in-class associations enabling us to increase our presence in the cities and territories where our clients need us most and where we believe we can make the most impact. Over the past 12 months, we have added substantial capacity in New Zealand, the Kingdom of Saudi Arabia and Hungary.  We now have more than 19,000 people, up 5% year on year, across over 500 owned and associated offices in 60 territories, with a combined annual turnover in excess of £2.6bn. 

“Our four global service lines, Capital Markets, Occupier Services & Commercial Agency, Valuation & Advisory and Residential remain central to our growth strategy.  It is through the uniquely collaborative nature of our network that we have been involved in some of the landmark real estate transactions around the world. These include securing a 700,000 sq ft pre-let to a captive centre in Manila; being appointed to manage and operate one of India’s busiest railway stations in Bengaluru, and being appointed as exclusive broker for all transactions in Asia Pacific and Europe for NTT Limited (comprising 28 companies in over 70 countries).

“Our investment in technology has never been greater and, as well as implementing new trading systems, we have developed a digital strategy for delivery over the next five years. 

“People are, of course, at the heart of everything we do. Key recent appointments include Rod Leaver, our new CEO in Australia, Wendy Tang, new group managing director of Singapore, Matt Tweedie, who has joined us to become group finance director next year, Edel McGrath, our new group head of IT, and a town planning team in the UK led by Stuart Baillie. 

“There is no doubt that diverse teams are better for business and we are committed to increasing dramatically the pace of change as we continue to learn and adapt.  We are pursuing a wide range of initiatives to address our business balance and have recently implemented a new training programme addressing unconscious bias and are working on a programme to effect radical change in our engagement with early careers candidates.  Unfortunately, the current structure of our sector is such that getting to where we want to be is taking longer than we would like but we are determined to make real progress in this area.

“At 55 Baker Street, our headquarters, we are transforming our physical space to support a transition to agile working. We have already renovated our Shanghai, Guangzhou, Beijing, Hong Kong and Manchester offices as part of our wider programme of improvement. By modernising the design of our working environments, we are maximising the value of these spaces and promoting healthier, more dynamic ways of working.”

“In closing, whilst the geopolitical turmoil remains self-evident and the prospects of a slowing world economy increase, it is evident that real estate remains at the forefront of investors’ minds. I believe Knight Frank is exceptionally well placed to engage with this capital when it is released noting that, in the range of options, property returns still appear competitive. Our much broader occupier offering will add further valuable insight.  We lead the field in engagement with private wealth, which enhances our residential activity and enables a much-needed conduit into the broader real estate arena. 

“It remains remarkable to me that whilst activity is constrained in some areas, our trading year to date is similar year on year. There is enormous scope for growth and we remain committed to building our platform.”

 

 

For further information, please contact:

Alice Mitchell, Head of corporate communications, Knight Frank, +44 (0)20 7861 1738/ +447776769510 [email protected] 

Alistair Elliott, Group Chairman & Senior Partner, Knight Frank +44(0)20 7861 1141 / +44(0)7836 233756 [email protected]

Knight Frank global market overview – October 2019

Market Overview

The world economy is in the midst of a synchronised slowdown following several years of strong growth.  While a global recession looks unlikely, several countries are at risk of entering a technical recession later in the year.  This slowdown and raised risk profile is prompting investors to focus on prime assets but also to consider opportunities for long-term income. 

Lower economic growth will be likely to result in lower interest rates for longer as central banks try to support economic activity.  The cost of servicing debt remains at record lows in many of our major markets and this is unlikely to reverse in the near future.  Low rates on cash holdings, and even the prospect and implementation of negative rates is pushing investors to seek higher returns – with property an attractive option – the Knight Frank Wealth Report confirmed that 23% of high net worth individuals (HNWIs) are planning to invest in property internationally in 2019. 

The on-going US-China trade war is a contributory factor to the global slowdown.  The trade war is reinforcing a trend for lower Chinese investment across the globe.  We expect Chinese investment in global real estate to continue but the rate of growth to slow.  We also expect a renewed focus by Chinese corporate investors in opportunities in the UK, Australia and Canada. 

Commercial

Global commercial property investment activity has seen a modest easing during 2019.  Investment in existing assets has been tracking at just over $900bn on a rolling 12 month basis, but there has been a shift in where capital has been deployed.  In fact, recent data showed that H1 2019 investment volumes had fallen in nine out of 10 of the world’s most significant cities in H1 2019. In contrast, cities in the next tier down saw rising investment over the same period.   

Investment in UK commercial property is undeniably lower this year - about 35% lower than the equivalent point at last year.  So far, about £30bn has transacted, while for the full year in 2018 some  £63bn of assets were traded.  Brexit uncertainty is held to be the cause of much of this decline but it is also true that there is a lack of willing sellers.  Those with desirable, saleable, assets (such as industrial or prime London offices) question where they would deploy the proceeds.  Those holding less desirable assets (poorer quality retail for example) can be reluctant to crystallise inevitable losses unless absolutely necessary.

Despite the political uncertainty, London has reinforced its position as the leading global investment hub, extending its lead as the largest global centre for currency trading, according to the Bank for International Settlements.  It has also become the number one hub for interest rate derivative trading, accounting for half of the $6.5tn traded daily around the world.  Between Q2 2016 (pre EU referendum) and Q2 2019, London added more than 14,000 jobs in finance and insurance and more than 83,000 tech jobs.  Investment in UK fintech companies nearly doubled to £2.2bn in H1 2019 compared with 2018.  This compares with a 29% decline globally over the same period, according to Accenture. 

The bigger picture is that significant global capital continues to target real estate.  Recent reports suggest there is $330bn of unspent capital in the hands of private equity funds targeting real estate, while a number of pension funds are still edging up their allocations towards real estate.  As interest rates on fixed income assets fall across much of the world, there are additional reasons for investors to target the positive yield of commercial property: pension funds cannot tolerate long periods of negatively yielding fixed income assets, while private wealth held in cash is being encouraged to find more productive uses by wealth managers.

Globally, large, well-developed real estate markets continue to see strong demand for industrial property.  Driven primarily by strong demand from retailers as they reorganise their supply chains to better serve an e-commerce driven world, logistics space on the outskirts of major urban conurbations typically remains undersupplied and yet in high demand.  This has driven some exceptional rental growth, and there has been a structural downward shift in yields.  However, we believe that the big upward shifts in rental levels and downward movements in yields have taken place for the major markets in Europe and the US.  

Retail faces familiar challenges.  The issues are well understood: too many centres, too much stock, and a genuine challenge from the shift towards e-commerce.  Shopping centres and retail warehouses continue to bear the brunt of sometimes stark downward revaluations.  That said, there is still investor demand for the right stock, for example, high street units in thriving towns.

With economic growth still positive in North America and much of Europe, and unemployment at cyclical lows, office occupier demand continues to hold up relatively well.  This, combined with a relative lack of overbuilding post the global financial crisis, and a greater corporate focus on high quality office space, means many such office markets are experiencing significant rental growth.

Asian commercial property markets are maturing rapidly, boosted in part by an easing in the outflow of capital to other real estate markets.  South Korean investors have increasingly taken the place of those from China on the global stage, and have been shifting their focus towards mainland European capital cities.

Residential 

Prime UK residential property, especially in London, offers significant opportunities for investors, due to the weak pound and price falls in most prime markets over the past four years.  Transactional and pricing evidence suggests the market downturn may be bottoming out.  Prices have been supported by the growing imbalance between supply and demand.  The number of new prospective buyers registering their interest in purchasing a home in prime central London increased by 29% in the year to September compared with the previous 12-month period.  Meanwhile, the number of new £1 million-plus listings declined by 28%.

There was an average of 11.4 new buyers for every new listed property in prime central London in September, the highest ratio in more than 10 years.  The total potential spend of buyers in London registered through Knight Frank was £55bn in September 2019, the highest such figure in more than five years.

The sectorial shift towards specialist property continues.  At this stage of the cycle, and with still significant levels of cash to deploy, many investors are moving towards more specialist property types – student housing, hotels, senior living, care homes, and multifamily residential.  

Specialist residential sectors in the UK continue to be boosted by long-term demographic trends reinforced by policy support.  The 2019/20 academic year saw the highest proportion of UK 18 year olds applying for university and the highest level of overseas applications for university entrance, including a 33% growth in Chinese students.  Knight Frank forecasts a 15% increase in full-time undergraduate numbers between now and 2030, an extra 220,000 students.  There are significant opportunities for student property investment across the county, especially mid-market offerings, as well as prime locations in London.  

Official forecasts show that the number of people aged 65 or over in the UK will increase by 20% to 14.4 million by 2027. We expect a large growth in the senior living sector, with a focus on the mid-market as well as prime markets.

Global residential markets are witnessing a general moderation in price growth, a trend we noted in the Knight Frank Wealth Report earlier this year.  The Knight Frank Prime Global Cities Index, which tracks the movement in luxury residential prices across 46 cities, increased by 1.4% in the year to June 2019, up marginally from 1.3% in March 2019 but still significantly lower than its four-year average of 3.8%.

Residential markets in key European cities continue to perform strongly.  German cities in particular have seen positive price growth - with Berlin leading the Knight Frank Prime Global Cities Index with annual growth of 12.7% in June 2019, and with Frankfurt seeing 12% growth over the same period. 

Asian residential markets are being buffeted by new regulations and wider economic concerns – although China continues to outperform.  In mainland China, tier one cities such as Beijing and Guangzhou saw prime price growth strengthen in the first half of 2019 as optimism grew surrounding the potential relaxation of housing policies.  In Hong Kong, the opening of various cross-border infrastructure projects, failed to counteract more immediate concerns over the US/China trade war and political discord.  Singapore’s prime market remains subdued as buyers adjust to the latest round of regulations, yet despite this, a number of record sales prices have been achieved so far in 2019.  

Australian prime residential markets have successfully weathered the slowdown experienced by the mainstream market with price growth in mid-2019 at 2.5% - supported by a lack of available prime stock. 

Prime housing markets in the US have seen a general slowdown against a backdrop of a strong dollar, and a rising tax burden in many key markets.  Despite this slowdown several bright spots remain: with the Boston market witnessing strong price growth as new inventory remains thin; Los Angeles is supported by very strong wealth creation dynamics; and the New York market saw an uptick in transactions in the first half of 2019 on the back of lower pricing and opportunistic investors, yet tax changes introduced in July have started to have an impact.