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Monthly Update – October 2020

Monthly Update – October 2020

Confidence Renaissance

Back in March, the ECB (European Central Bank) chief Christine Lagarde was forced to apologise after stating that the central bank was not responsible for closing the spread between the sovereign debt yields of nations across the euro area. The comments led to the biggest increase in Italian bond yields for over a decade, as investors feared the ECB was distancing itself from financial support for the country just as the first wave of COVID-19 was peaking.

Confidence in the ECB’s support is back in spades now however, with the Italian 10-year yield dropping to a record low of 0.65% during October. And some record it is. Deutsche Bank recently plotted a chart showing Italian 10-year yields back to, wait for it, 1310. Today’s yields are the lowest in over 700 years of recorded data.

Despite the meagre yield on offer, investors are clamouring for more. During the month, Italy was able to issue 30-year bonds for 1.8%, the second lowest yield ever. Notwithstanding Italy’s debt-to-GDP ratio reaching its highest level in at least 150 years, the market clearly believes that, Freudian slips or otherwise, ECB support will remain in place.

Something to Write Home About

The average death for a homeless person in the UK is 47 years old, a lower life expectancy than that of any country’s population across the world. Unfortunately, homelessness is on the rise in the UK, with an estimated 320,000 people living without a home. As numbers have risen, suitable accommodation for those which find themselves without a home, has failed to keep up with the increase. This has resulted in local authorities across England spending over £1bn on accommodation such as hostels and bed and breakfast hotels.

Home REIT, a new holding across portfolios during the month, aims to tackle this issue by acquiring and letting properties to the institutions involved in the housing of a person or family without accommodation, such as a registered charity or housing association. The strategy seeks to create value for all stakeholders. Firstly, the Company’s properties will not only provide suitable living accommodation for those without a home, but it is also hoped that they will offer a suitable setting for people in need of rehabilitation, allowing stability for those which would have been in and out of short-term accommodation.

Secondly, the local authorities, funded by the Department for Work & Pensions, should see significant savings through the REIT’s commitment to offering sustainable levels of rent. As an example, Home REIT estimates a typical weekly rent per occupant of £65 in Liverpool. This compares to a weekly rent of £250 for Bed & Breakfast accommodation in the City, an option the local authority may have been forced to use due to lack of supply.

Finally, shareholders of the REIT will invest in a portfolio of assets let on very long leases with a government backed income stream. Rental growth will typically be contractually linked to inflation, whilst there is also the potential for capital growth via yield compression and the investment manager’s focus on ‘off market’ transactions, where favourable purchase prices may be secured. The minimum targeted dividend yield will be 5.5% per annum.

 

Important Information

Source for all information: Bloomberg Finance L.P. For professional investors only.

 

Past performance should not be seen as a guide to future performance. The outlook expressed in this communication represents the views of Tom Delic at the time of preparation and are not necessarily those of Seneca Investment Managers Limited. His views may be subject to change and should not be interpreted as investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This document is provided for the purpose of information only. Seneca Investment Managers Limited is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP20 271.

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