value of gmg's uk assets to take a pounding

With the UK pound heading the way of the of the Zim $, the value of GMG's UK assets in A$ is set to collapse.

From Intelligent investor:
Let’s conduct a brief thought experiment along these lines for Westfield – with the aim of intellectual provocation rather than prediction. So what might the confluence of higher inflation in the UK and a falling pound mean for Westfield’s Australian owners? We’ll set aside other economic variables (such as unemployment and tax rates).


High inflation should increase both Westfield’s top and bottom lines as the rent paid by a typical Westfield tenant contains an inflation-linked (or at least revenue-linked) component. That would combine favourably with the debt held against Westfield’s UK assets which is denominated in nominal pounds – that is, principal amounts are fixed at time the loan is made.


Westfield would, in effect, be paying off loans denominated in old, depreciating, currency with profits being earned in new, inflating money. This would substantially ease the repayment burden and is something of a microcosm of Martin Wolf’s economy-wide observation that ‘creditors know that a burst of inflation would solve many problems in the US and the UK’.


So, taking Westfield’s UK assets on a standalone basis, a bout of inflation might not be a bad thing on the surface. But there are other factors. With high inflation, the capitalisation rates used to value Westfield’s shopping centres would likely soar, leading to significant devaluations of the assets.


These lower valuations would in turn be translated back into even fewer Australian dollars if the pound were substantially devalued. Westfield’s foreign currency hedging would mean such a blow would be delayed, but it could not be avoided.







The issue is complex, as our Westfield exercise shows. And the particular problems that might arise are not at all clear, let alone the appropriate response from Australian investors with only indirect exposure to them.


The UK may somehow manage to avoid any dire consequences from its quantitative easing. But ignoring the issue and hoping there won’t be any ramifications seems foolhardy to us. At the least, it’s prudent for Australian investors to countenance the possibility of a much weaker pound and review their portfolios with an eye to their direct and indirect exposure to sterling-denominated assets.


More than 66 years ago, after the second battle of El Alamein, Winston Churchill announced that ‘this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.’ Today, it seems to us, we may be witnessing the beginning of the end for the strong British pound.

Greg Hoffman

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