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Rathbone Strategic Growth Portfolio
Should you still invest in real estate? Given the remarkable changes that have taken place across the country due to the COVID-19 pandemic, it’s an understandable question.
So many businesses have had to reassess their operations in the wake of coronavirus restrictions that investors can be forgiven for being slightly sceptical. After all, the past 18 months have seen offices standing empty as people worked from home, and the nation’s pubs closed to comply with strict social distancing laws.
It remains to be seen whether people will return to either of these locations with the same enthusiasm, while the online shopping boom threatens the high street’s viability.
The issues were highlighted in a study by PricewaterhouseCoopers, the professional services firm, and the Urban Land Institute, entitled: ‘Emerging Trends in Real Estate. An uncertain impact’. It acknowledged it was a “hugely challenging time”, with the prospect of a protracted and fragile economic recovery, as well as the threat of further COVID-19 waves.
“The pandemic has forced millions to work from home, closed retail stores and accelerated structural changes impacting three mainstay sectors of the real estate world – office, retail and hospitality,” it stated.
However, CBRE, the property advisor, believes the UK property market is on track for a swifter recovery than was predicted at the start of 2021. It is now expecting UK GDP to return to pre-pandemic levels by the end of this year – a full six months earlier than originally forecast.
While accepting not all property sectors have returned to full health, its July update highlighted logistics as an area that was helping to lead the recovery. Tasos Vezyridis, head of logistics & retail research at CBRE, said: “Driven principally by consumer buying habits over the course of the pandemic, demand for logistics property has reached record levels, which we expect to continue.”
Zsolt Kohalmi, global head of real estate and co-chief executive officer of Pictet Alternative Advisors, believes it’s a time of change for real estate. “The COVID-19 pandemic has accelerated changes in how we live, work, shop and spend our leisure time, while demand for more efficient, environmentally-friendly buildings is growing,” he said.
“These shifts demand a more thoughtful approach to refurbishing and constructing buildings, as well as representing a large, long-term and growing investment opportunity. In a world where inflationary pressures are rising but interest rates remain near zero, core plus real estate can offer investors a strong, sustainable income stream, inflation protection and a degree of equity upside through active asset management,” he said.
The investment merits of property aren’t up for debate, agrees Marcus Phayre-Mudge, manager of the TR Property Investment Trust.
“It’s an asset class that warrants its position in a well-diversified portfolio, complementing the likes of equities and bonds, and providing scope for attractive returns – both income and growth – in its own right,” he insists.
While the UK high street’s problems are well known, he argues that many other sectors are enjoying rental growth thanks to stable tenant demand and tight supply. “There are lots of negative property headlines, but it’s important to remember that real estate is an exceptionally diverse asset class,” he said.
The diverse range of listed property companies enable managers to focus exposure on sub-sectors that are enjoying positive demand/supply characteristics. “Logistics and light industrial rents across all of Europe are rising as a combination of more online shopping, shortened supply chains and less reliance on ‘just in time’ delivery has driven a huge increase in demand for storage space,” he added.
Others – like Rathbone Strategic Growth Portfolio manager, David Coombs – argue that there is money to be made in the retail value chain and ‘destination’ stores. You can hear his views on this podcast:
Nigel Ashfield, co-manager of the TIME:Commercial Long Income fund, has shifted the portfolio’s positioning. Logistics is now the largest sector and there is no exposure to office space. “This increased exposure to logistics is proving beneficial as the sector is seeing positive valuation movements supported by the increased occupier demand and supportive dynamics in the sector,” he said. In addition, the fund has never had exposure to the “more at-risk sectors” such as high street retail and shopping centres.
In a period where rental growth in many sectors of traditional commercial property remains uncertain, combined with concerns around increased levels of inflation, one of the key features of the fund is the comfort provided by structured rent reviews. “Within the portfolio 94% of the rent reviews are linked to an inflation index or have a fixed percentage growth,” said Nigel. “It is worth noting that the portfolio currently has no voids.”
Looking ahead, Ainslie McLennan & Marcus Langlands Pearse, co-managers of Janus Henderson UK Property PAIF, are optimistic – despite the variation in economic forecasts due to coronavirus.
“With the UK having moved quickly to procure and administer vaccines, the easing of lockdown restrictions should, over time, be positive for good-quality, well-located commercial property that is sought after by tenants and supports our day-to-day social and working life,” they said.
The fund management duo’s approach to investing in UK commercial property is to seek and own high-quality properties with robust tenants on generally long leases in good locations. “One of the fund’s key investment criteria has always been a focus on the strength and resilience of the underlying tenant base, as well as the diversification across sectors,” they said.
In many ways, they believe that COVID-19 has accelerated the anticipated market shifts. They like industrial and logistics as they are beneficiaries of the rise in ecommerce that was encouraged by lockdown. “Retail warehousing is an area we like, particularly because the size of the units easily allows for social distancing,” they added. “Supermarkets have been a beneficiary of the lockdown and those tenants occupying properties owned by the fund continued to trade well.”