Switch: More retail space is being used by online firms such as Amazon
Not so long ago, property investment was a sleepy business that moved at a sloth-like pace. Investment managers could build a dependable portfolio of shops and offices and sit back and wait for the rental income to come in, reliable as clockwork.
But in recent months, the industry has undergone a revolution as the pandemic accelerated new consumer trends. The long-term fate of the high street now hangs in the balance, while distribution warehouses for online retailers reign supreme.
The future of office space is in jeopardy, while laboratories and data centres, which proved themselves invaluable during the pandemic, are on the up.
So where does this leave investors? Traditionally, property has been a great diversifier in a portfolio as rental yields do not move in lockstep with equities or bonds. And it is one of the few remaining reliable sources of income, in a world of low-bond yields.
Experts believe there are still opportunities – but investors need to be more careful than ever when seeking them out.
FEWER SHOPS BUT MORE WAREHOUSE SPACE
Anyone who lives near a high street needs no property expert to tell them that bricks and mortar retail is facing a crisis. Around 13 per cent of shop units in the UK are lying empty and the number could hit 25 per cent by the end of the decade, according to forecasts from real estate firm Savills.
But that doesn’t mean there are no longer opportunities for property investment in retail. While fewer shoppers are visiting both the high street and retail parks, soaring numbers are buying online – even as we move out of the pandemic.
Tom Walker, portfolio manager of fund Schroder Global Cities, believes this trend has created a transfer of value from shopping centres to distribution warehouses used by retailers to manage online sales.
‘The high street is not dead,’ he says. ‘It’s simply that we won’t need as much retail space as we did five or ten years ago. Shopping centres and high streets which stand the best chance of survival are those that offer an experience – a destination that shoppers are excited to visit.’
Mick Gilligan is head of managed portfolios services at stockbroker Killik and Co. He also spies opportunities in logistics. ‘Almost every retailer has to have an online offering, and logistics assets are in demand as a result. Vacancies in these spaces are at a record low.’
OFFICES GET A FACELIFT AS NEEDS CHANGE
A similar disruption is playing out with office buildings. The pandemic has sped up trends for employees to spend some of the week working from home, reducing the amount of office space that companies require. Firms are also starting to make different demands of the office spaces they rent.
Richard Kirby, manager of BMO Commercial Property Trust, says: ‘Employers are looking for buildings that are designed around employee wellbeing. Desks are less likely to be densely packed, in favour of more meeting rooms and break-out areas as workers increasingly come into the office to collaborate.’
Location is likely to become more important. There is still strong demand for prime London office space, but poorer quality offices in less central locations are likely to suffer. Rob Morgan is an investment analyst at online wealth platform Charles Stanley Direct. He predicts major employers will look for offices that help them reduce their environmental impact.
He says: ‘There will be demand for more space that meets increasingly tough environmental targets, at the expense of older buildings that have not been extensively refitted with appropriate heating, cooling systems and proper insulation.’
TRUSTS ALLOW INVESTORS TO SELL IF THEY NEED TO
Property is hard to sell in a hurry. The process is long and complex, and anyone who tries to do it in a rush is likely to have to accept a poor price.
That is why open-ended funds (unit trusts and investment companies) are rarely ideal for property investment. If many investors want to get their money out at once – as happened, for example, after the Brexit vote and at the onset of the pandemic – fund managers either have to sell properties on the cheap or prevent investors from accessing their money until things settle down.
Investment trusts offer a better alternative as they are listed on the London Stock Exchange. As a result, investors can buy or sell shares as they please while the fund managers do not have to sell assets when the property market goes into crisis mode.
The price of shares in a property investment trust can deviate from the value of the underlying holdings. If the shares are worth more, they trade at a premium. If worth less, they trade at a discount. Buying at discount can be a good way to pick up a bargain. However, sometimes there is a good reason why a trust is undervalued, and indeed some investors are happy to buy at a premium if they have confidence in the product they are buying.
Charles Stanley Direct’s Rob Morgan recommends that property investors look for income diversification, making sure they are not too reliant on any one sector. He adds: ‘Being able to target the areas where rental income growth is robust and having the agility to move in and out of sub-sectors according to how valuations move could be an important advantage.’
Morgan likes TR Property, an investment trust that holds a portfolio of real estate investment trusts and property companies across Europe.
He also rates Standard Life Investments Property Income Trust, because it has a high yield – 4.8 per cent – and its shares are trading on a 20 per cent discount. He also mentions Tritax Big Box and Warehouse Real Estate, two logistics trusts that have proven fit for the digital age. However, because their shares are trading at large premiums, he warns: ‘We continue to like both, but their shares cannot be considered to be in bargain territory.’
Ben Yearsley, a director of Plymouth-based Shore Financial Planning, signals Supermarket Income Real Estate Investment Trust. It provides investors with a five per cent yield, but its shares are trading on an 11 per cent premium. ‘The trust buys supermarkets that can fulfil physical shopping as well as online deliveries,’ he says.
Pandemic gets labs growing
Biotech and the internet became more integral than ever during the pandemic, helping to increase testing and research facilities – and enable people to work, shop and communicate without having to leave home.
Demand for good laboratories and data centres is still growing.