Brexit and the UK consumer with Investec UK Alpha
Managing Director, Darius McDermott, discusses Brexit uncertainty and choppy outlook for 2019 with...
How we shop has changed markedly over the past few years. I can remember trips to the high street with my girl friends being all-day, sociable affairs. These days, idly browsing in the shop is a rare treat as I’ve either got an unwilling toddler or husband in tow.
My shopping experience is instead more of the ‘click and collect’ or ‘click and wait for the delivery’ variety. And I’d hazard a bet that it’s the same for you too. While many bemoan the ‘death of the high street’, the convenience of online shopping cannot be denied. And it is creating investment opportunities in areas I, for one, had not really thought about. Here are a few examples:
Believe it or not, the UK is one of the most advanced UK online retail markets in the world. Brits today are demanding same-day or next-day delivery times, whereas a few years ago four or five days would have been the norm and parcel delivery volumes have doubled in the past six years*.
This is forcing logistics occupiers to be close to consumers and, as John Danes, head of continental European property research at Aberdeen, describes it, “the rise of ‘last mile’ urban logistics units – distribution facilities within or close to cities. The ‘shed’ is replacing the shop.” Not only this, John pointed out that online retail requires three times the logistics space of traditional retailing to cater for returns. Given that London alone is growing by 1 million people per decade*, he believes demand is set to continue increasing.
Another trend is in warehouse retail parks. You know the ones. About a mile outside the centre of town, usually populated with a carpet shop, DIY centre and fast-food outlet. But getting the right mix of tenants is key. First you need to attract the shoppers in the first place, and Aldi is cited as a great pull. If you have refreshments close by, shoppers linger for longer and, with the growing trend towards green energy, some property managers, like Ainslie McLennan, who runs Elite Rated Henderson UK Property, are also installing electric chargers in the car parks, with the aim of attracting more regular visitors.
Then there is keeping employees happy. If property managers want to make offices desirable, they need to spot the competitive advantages which will keep both owners and employees happy and encourage them to rent the space for longer: shower facilities and and bicycle storage, for example.
Around 16% of the Henderson UK Property fund is invested in offices, but Ainslie prefers the smaller spaces as she believes they will be more ‘Brexit-proof’. Away from the UK, the managers of Elite Rated F&C Real Estate Securities fund like Entra, a Norwegian stock that is benefiting from ongoing strength in the Oslo office market, as well as a more positive outlook for the Norwegian economy as the oil price continues to rise. This fund has 25%** invested in European shares related to the office sector.
Student accomodation is another growing area for property investments. With a stable flow of tenants and more and more universities renting entire buildings, the opportunities are growing. The Henderson UK Property fund now owns four sites in Glasgow, Durham, Exeter and Kingston. It’s also a reasonably Brexit-proof area, as many tenants are Chinese.
F&C Real Estate Securities has also made money from student accommodation, both by investing in stocks for the long term and shorting one where they correctly believed the dividend would be cut.
Post-Brexit, property funds had a very difficult time initially. Investors, worried about the uncertain future, withdrew their money in droves and many funds had to temporarily cease trading. As it happens, the sector actually performed well overall in 2016 and 2017, and has recovered the initial losses, while the income payments also remained steady.
Ainslie McLennan is cautious on the outlook for the asset class in 2018-2019. Given that Brexit uncertainty is still very much shaping the UK’s economic backdrop, key to a sustainable income and any capital growth will be about finding and developing properties with difficult-to-replicate – and often overlooked – competitive advantages.
In Europe, both F&C Real Estate Securities and Premier Pan European Property Share have Germany as their second largest regional weightings after the UK (25%** and 27%** respectively) where commercial and residential companies are both doing well. The third largest weighting in both is France (17%** and 15%**).
*Source: Aberdeen Asset Management, Thinking Aloud, December 2017
**Source: Fund fact sheets, November 2017