United Kingdom, Casey (Schroders): “We continue to focus on travel and real estate”
Businesses operating in the UK, but indeed around the world, have faced many headwinds and driving forces for change in recent years. After nearly fifteen years of ZIRP (zero interest rate policy) and, now, facing the rapid increase in financing costs, many companies are having to reevaluate their business strategies in a context of great change in the economic regime. Truth and Business talked to Bill Casey, Schroders’ experienced UK and Europe manager.
Is a more competitive context necessarily negative?
“From our perspective as long-term investors, we don’t necessarily see tough times as a negative. There are well-funded industries that have the scale and profitability to overcome these challenges. The benefits of these companies are becoming increasingly clear as rising operating costs, and especially the cost of capital, leads to a downsizing of the industry and reduces competitive intensity. In many industries, competitive intensity is descending from high levels after ZIRP long favored challenging or maverick business models. In this
context, we have identified some interesting, completely different sectors, ranging from travel and leisure to retail, construction and real estate and identified some leading companies within them that we believe are benefiting from the current market environment”.
So are travel and leisure also on the upswing in the UK?
“The UK hotel industry has had a particularly difficult time in recent years, for obvious reasons. There are a number of large hotel groups, but far fewer of them outside of London and the big cities. Premier Inn, the main asset of the Whitbread behemoth, competes with larger groups like Travelodge outside the big-city market, but most of the market is taken up by independent hotel chains and individual owners. Whitbread is experiencing a reduction in competitive intensity as some independent hotel groups cut back for
lack of funds. On the other side of the equation, new hotel openings are very limited. This allows Premier Inn more room to grow and invest.”
How are supply chain problems affecting the market?
“The shift to online shopping has decimated the High Street and many retailers and brand owners have failed to make the leap online profitably. Next, the British clothing and household products multinational, on the contrary, did so with great success, aided by the fact that with Next Direct it was already, de facto, an e-commerce business, with the logistics infrastructure and the know-how needed to operate in a post High Street world. The recent squeeze on the cost of living, the rapid increase in the cost of finance, the abundance of global supply chain problems are making the barriers to compete ever higher to scale. Not surprisingly, the market share of the Next brand continues to grow compared to its main competitors. It also comes as no surprise that Next recently raised its profit forecast for 2023.”
What stage is housing development in London?
“The construction sector is also suffering from the fact that designing, developing and selling in London is in many ways more complex than anywhere else in the country. For this reason, the presence of major listed builders on the London market is limited. Berkeley is the largest builder operating in
London with a market share open to around 12%. The return of international buyers (who account for about 50% of Berkeley’s sales) after the pandemic is also helping demand in a world of high mortgage rates. In a more restricted supply context, it is interesting to note that, if
adjusted for inflation”.
The construction sector is facing major disruptions. Does it still offer interesting opportunities?
“That’s right, the sector has undergone a series of disruptions and changes in recent years, including the high cost of energy, the rising cost of carbon credits and the need to invest heavily in decarbonisation. Indeed, the latter is becoming a prerequisite for winning large national and regional contracts for road paving, in a market that was previously dominated by price. Market forces are forcing the industry to focus on the strongest players of scale, such as those that have the cost and scalability to hedge volatile energy costs or have the budget to invest in renewable technologies and fuels. Breedon, a producer of aggregates and asphalts, is a clear winner in this sector well positioned to capture share over time. The UK has a high need for road repairs and the capping and investment program in
infrastructure will allow continued growth of the sector. When we invest, we look for pricing power as an important ingredient in judging the quality of a company. Breeden enjoys pricing power in an industry where prices have outpaced general inflationary trends.”
We close with real estate. Where are we at?
“The ever-increasing cost of capital and the shock of the pandemic are putting a strain on new investments in the sector. Unite is the longest established and leading provider of purpose built student accommodation (PBSA) in the UK. He is one of the very few operators
fully integrated (developer, owner, operator) in the industry, and its size and integrated model make it the most profitable at the moment. Student accommodation is a specialist real estate industry and a highly focussed and customer centric approach is required to make good profits. Barriers to entry into the overall supply of student accommodation are rising rapidly at a time when demand is also rapidly growing. Unite has seized the opportunities well, having invested heavily in the London land market after Brexit when other investors were retreating. It is very well positioned to grow over the next decade, as the demographics are particularly supportive, as the 18-year-old population will increase by more than 20% by 2030.”