The UK PIN Fund (our fictional Fund consisting of property-related companies that are listed on the stock exchange) finally stopped losing money in the final quarter of 2022, with the average share price flat (+0.6%) but returning a profit of 1.9% overall thanks to dividend payments. However, before we get too excited, it is worth pointing out that 2022 was the worst year for our Fund since its creation in 2014.
It seems that the decisions made by one man (Putin) can have more of an impact on our Fund than a once in a century pandemic, or a long drawn out (Br)exit from the European Union. Overall, our Fund made a loss of 31.3% in 2022, ranging from the ‘best’ performer, Whitbread, returning -11.6% to our worst performer Persimmon returning a disastrous -48.9% last year.
Most people suspected that this was coming. Interest rates at close to 0% could not last forever, especially with governments around the world pumping even more money into their economies during the two Covid years. Governments have been ignoring, some would say ‘manipulating’, the real rate of inflation since 2008 and they have been ‘kicking the can down the road’ regarding national debt levels since then also. Unfortunately for us, the can hit Putin in the ankle and he picked it up and threw it in our face. Inflation has surged at the worst possible time, just as businesses were desperately trying to earn back some of the losses incurred during lockdowns and self-isolation between Q1 2020 and Q1 2022.
Even before Russian troops (re)entered Ukraine in mid-February last year, inflation was already rising thanks to long periods of strict lockdowns in China. According to data published by the United Nations Statistics Division, China accounted for 28.7% of global manufacturing output in the year before the pandemic arrived in Europe (2019). If the world has 10 factories and 3 of them close for 2-3 years, the prices for most goods are going to rise. The war in Ukraine, and the following economic sanctions that were imposed on Russia, just added inflation to energy prices as well.
Globally, governments could no longer keep the saucepan lid on top of the pot of boiling water and interest rates had to start rising. Few sectors are more negatively affected by rising interest rates than property, especially residential property, as it crushes most homebuyers hopes of being able to afford a new home/mortgage and also wipes out a huge chunk of the monthly budget for existing homeowners.
