GENERAL ELECTION 2015 RESULT & IMPLICATIONS

2015 General Election Implications

*Conservative 24 seat gain and overall 331 MPs was beyond Tory HQ’s “wildest dreams” at 290.

*Surge in SNP wipes out Labour’s Scottish base and leaves substantial new questions about the independence movement just 8 months after the SNP lost a referendum that was intended to provide a final answer to Scottish independence.

*Collapse in Lib-Dem support in both London and SW England sees 85% of Lib-Dem MPs lose their seats. This was substantially higher than loss estimates.

*Labour loss of seats in Scotland, and Northern England requires root and branch reform and another look at the Trade Union’s influence on Labour.

The introduction of fixed 5 year terms via the Fixed Term Parliament Act 2011 means the next election is due only in May 2020, unless a motion of no-confidence is passed, or a motion for an early election is agreed by at least 2/3rds of the House of Commons. The PM has lost his right to call an election when it best suits his party. Therein lies a problem. Will the small 12 strong Conservative majority, (assuming it is not enhanced by an informal DUP) be sufficient for five years? What if the Eurosceptics in the Conservative party start a rebellion as in the 1992 parliament? By 1997 John Major’s 21 majority has been cut to zero due to deaths and defections.

Overall the result is good for one major reason. Substantial uncertainty has been removed. Gone are rather stupid ideas like changing non-domicile rules, mansion taxes, introducing rent controls and a new spending surge on NHS and other government infrastructure. Gone also is the lack of government ideology caused by the Coalition. The Conservatives are now free to introduce more welfare reform and reach UK Budget deficit targets earlier. Already there is speculation of an early Conservative Budget that will cut £12bn from welfare spending.

The SNP’s rout of Labour in Scotland is a major political realignment. Does its new opposition mandate represent a credible threat to the UK? The election whilst removing some uncertainties has created a notable new one.

“Conservative sensitive” UK equities

Generally the Conservative victory is positive for the UK property/ building sectors and specifically those linked to London. In the election run-up, a number of companies, Countrywide, Foxtons, Telford Homes had spoken of a bottleneck, with buyers waiting for the General election. Post-election there is likely to be a release of pent up demand partly due to expectations of more property friendly government incentives.

Who gains from a Conservative majority?

Savills (SVS) BUY

Savills is a global real estate services provider with an international network of over 600 offices. It acquired Studley Inc in May 2014 to enhance its US capabilities and Merchant Capital KK in Tokyo to boost its property investment management arm Cordea Savills. The business has a strong position in residential central London, in property management in Asia and USA and in consultancy services. Savills aims to be the top adviser for around $5trn of property assets held by the world 200k ultra high net worth individuals (UHNWIs).

Key Catalysts

Savills continues to grow office / staff presence in the UK (50% revenues) and US (10% revenues). Generally these property markets are benefiting from very low interest rates and a rebound in property markets caused by government incentives and portfolio diversification. Savills consensus EPS forecasts for 2015 are 59.7p (2014 EPS 55.2p) rising to 64.1p in 2016. Savills should comfortably exceed its 2015 EPS target.

Key Risks to Price Target

1. i) Savills valuation is sensitive to transactions for central London residential property.
2. ii) Savills operations in Central Europe are currently loss making.
3. iii) Approximately 31% of revenues are derived in Asia Pacific, where some property markets, such as China are depressed.

Shaftesbury (SHB) BUY

Shaftesbury is a leading London property developer and REIT (“Real Estate Investment Trust”). It reported a portfolio value of £2.6bn with net assets per share of 713p in the year to end September 2014. The business owns substantial assets in W1, WC1 and WC2, key codes in West and Central London. The board have been making significant strategic investments in enhancing its core portfolio, investing £108m in 2014 and converting under-utilised upper floors, into apartments.

Key Catalysts

Ahead of Interim results on the 21 May our expectation is for continued strong rental income growth/ low vacancies. The results will include details of the Q1 launch of Kingly Street/ Foubert’s Place development which adds 7.5k of retail space, 10.5k office space and at Kingly Court (43k sq ft of restaurant space). Shaftesbury has 415k sq ft of office space on relatively low £41 rent per square foot. The recent tightening of rents in central London should improve office pricing but also offers conversion opportunities.

Key Risks to Price Target

1. i) Shaftesbury’s valuation is sensitive to London West End trends in rents and prices
2. ii) Shaftesbury is in detailed talks with Westminster County Council over planning permission for properties in Charing Cross and Carnaby St.
3. iii) Shaftesbury’s growth in net assets depends in part on its ability to acquire new assets, current availability of suitable development assets is limited in central London.