GDP is not the only economic factor that has a bearing on property’s performance. Retail property performance is correlated with retail sales and, historically, with the propensity of the UK consumer to keep buying through thick and thin, retail property has been a good steady performer. It’s not looking quite so good now. As a rough approximation, the growth in total retail sales volume is equal to the growth of online sales volume, implying that bricks-and-mortar sales are static. The failures of traditional retailers over the past decade or two illustrate the problem well; for those businesses, their leased properties have become a liability.
Against that, Hammerson ‘s strategy is to hold ‘destination’ shopping centres, which are attracting customers to the leisure elements. Even so, I remain very cautious about the few REITs in that part of the market. It was not long ago that Intu (formerly Capital Shopping Centres) was considered to have one of the most ‘prime’ portfolios of shopping centres. Recently, I saw one analyst describing it as secondary. The problem is that property assets depreciate over time. Some of that depreciation can be compensated for by pumping money into it, but other forms of depreciation – such as that caused by a change in shopping habits or competition – can be much more difficult to eliminate.
London offices have, in recent years, been a boon for Land Securities and British Land, as well as the more specialised REITs such as Great Portland Estates and Derwent London. The first two of this group have taken advantage of exceptional tenant demand – vacancy rates are at historic lows in the City and West End – and developed large and, in some instances, landmark buildings. In the case of the larger developments, these have often been joint-ventured, thereby spreading the risk. Grade A (new or nearly new) office rental values are high and the gaps between those and grade B (and even grade C) have compressed, indicating that tenant demand remains strong. The Brexit vote did cause a hiccough, but there is a growing acknowledgement that tenants are not going to defer take-up of needed space for the years that negotiations might require: they have businesses to run.
Regional offices, and the smaller REITs that are active in them, are a mixed bag. Over the long term, they produce little growth and, although development can be profitable at the right time in the cycle, this particular cycle does not lend itself to strong performance in these markets. Stocks like Town Centre Securities, McKay Securities and Mucklow Group are small, riskier than the large caps, and best regarded as yield plays.
A particularly interesting stock is Shaftesbury, which invests in ‘off-prime’ retail on the fringes of the West End of London. These areas benefit from rippling-out retailer demand in the core areas which have benefitted from tourist demand. The weaker pound should continue to support such sales, although replenish stock at higher prices will reduce the benefit somewhat.
Segro specialises in industrial and logistics units, with the emphasis increasingly on the latter. This property sector, which can be management intensive, has had a very good run in the last few years, outperforming both offices and retail most recently. In part, this is a reflection of the limited new development that occurred in the period post the 2008/9 recession, and the demand from distributors seeking to restructure their networks to meet requirement from e-commerce. This has been conducive to new development in the last couple of years, although the excess demand should largely become satisfied soon. The sector has further to go, but I would be wary of waiting too long before selling.
Workspace is active in small unit light industrial units typically used by small businesses for quasi-manufacturing quasi-services, situated in and around London. Its lease terms are very flexible and its default & vacancy rates low, but it has to manage massive turnovers of tenants, which is an administrative burden. Nevertheless, it has proved remarkably resilient in the downturns.
Part three of this article will look at the prospects for the sector
Credit to Diana Patterson
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