Prop­erty in­vest­ment land­scape has changed for­ever

Clos­ing of stores and the new norm of work­ing from home means it will be like stock-pick­ing from hereon

The Daily Telegraph - Business - - Business Comment - ‘Who cares about the pres­tige City ad­dress, when the traders are sit­ting at home in their shorts?’ Tom Steven­son is an in­vest­ment di­rec­tor at Fidelity In­ter­na­tional. The views ex­pressed here are his own. He tweets at @tom­steven­son63

What a time to be a com­mer­cial prop­erty in­vestor. Just when the real es­tate world was get­ting its head around the re­duced cir­cum­stances of the high street, along comes the pan­demic to throw the fu­ture of of­fices into doubt as well. Iron­i­cally, it’s in­dus­trial prop­erty, the ugly duckling of the as­set class when I used to cover the sec­tor as a jour­nal­ist 25 years ago, that’s now all the rage. Lo­gis­tics and au­to­mated ware­houses are the go-to in­vest­ment.

Real es­tate was in the spot­light last week as the quaint tra­di­tion of quar­ter day – when the next three months’ rent tra­di­tion­ally falls due – un­der­scored why you might not want to be a re­tail landlord right now. The Gov­ern­ment’s re­sponse to the enforced three-month clo­sure of non-es­sen­tial shops was to pro­tect ten­ants from evic­tion for non-pay­ment of rent. Un­sur­pris­ingly, most shop­keep­ers took the op­por­tu­nity to hold onto their cash. Why would they not? Just 14pc of the £2.5bn due from re­tail ten­ants was paid on time.

In re­al­ity, most of the rent will be paid in due course – three months ago at this stage less than 20pc had been handed over, but this had risen to 55pc within four weeks. There’s no ques­tion, how­ever, where pub­lic sym­pa­thy, and so gov­ern­ment pol­icy, is likely to set­tle. Re­tail­ers em­ploy­ing thou­sands of vul­ner­a­ble, low-paid work­ers or fat-cat land­lords? Only in

Ger­many is a con­tract viewed as sacro­sanct these days.

It doesn’t help that some high­pro­file land­lords have shot them­selves in the foot. Intu, which owns 17 of the coun­try’s most high-pro­file shop­ping cen­tres, in­clud­ing Gateshead’s Metro Cen­tre and Lake­side in Es­sex, raised the white flag on Fri­day af­ter fail­ing to per­suade the banks which have lent it £4.5bn to give it the breath­ing space it needs to sur­vive. Intu could not do much about the pan­demic, but it might have re­alised that an over­stretched bal­ance sheet left it vul­ner­a­ble to a fall in the value of its prop­er­ties and non-pay­ment of rent, what­ever the trig­ger might be. There were plenty of op­por­tu­ni­ties in re­cent years to raise some eq­uity at a sen­si­ble price. It should have fixed the roof while the sun was shin­ing.

Mean­while, the re­mark­able ease with which many pro­fes­sional ser­vices have nav­i­gated the shift to work­ing from home has raised a huge ques­tion mark over the fu­ture of the glitzy city-cen­tre head­quar­ters build­ings the in­dus­try has tra­di­tion­ally seen as the most prime in­vest­ment. The very idea of putting peo­ple through the risky, tir­ing and ex­pen­sive ordeal of com­mut­ing to a crowded build­ing to check their emails seems as old­fash­ioned as quar­ter day it­self. I very much doubt whether some of us will ever go back to the of­fice full-time.

Iron­i­cally, this dis­rup­tion of the prop­erty in­vest­ment busi­ness comes as de­mand for real es­tate’s his­tor­i­cally high and sus­tain­able in­come has never been greater. The boomer gen­er­a­tion now moving into re­tire­ment owns the largest slice of the world’s in­vest­ment as­sets and their in­ter­est in grow­ing their pen­sion pots is now se­condary to their de­sire to pro­tect their in­fla­tion­ad­justed value and to earn a de­cent in­come from them. With the other prin­ci­pal fixed-in­come as­set class – bonds – of­fer­ing too lit­tle yield or too much risk, prop­erty should be tick­ing plenty of boxes for older in­vestors. In­deed, money has flowed into the as­set class dur­ing the yield-hun­gry post-fi­nan­cial-crisis decade. The weight of cash has pushed yields to lev­els at which they barely com­pen­sate in­vestors for the cost of de­pre­ci­a­tion let alone pro­vide a real in­come. This is par­tic­u­larly the case at the so-called prime end of the mar­ket, where in­vestors are hop­ing to find the sta­bil­ity for which they have al­ways val­ued in­vest­ment in prop­erty. The gap be­tween the yields on the “best” prop­er­ties and the rest has widened sig­nif­i­cantly in re­cent years.

But what if what con­sti­tutes prime has been changed by the pan­demic. The glitz of the des­ti­na­tion shop­ping cen­tre seems less im­por­tant when the an­chor ten­ant can no longer pay its bills. Who cares about the pres­tige City ad­dress, when the traders are sit­ting at home in their shorts? What mat­ters more to­day is the sus­tain­abil­ity of cash-flows and the abil­ity to adapt to dis­rup­tive changes, whether these are tech­no­log­i­cal, en­vi­ron­men­tal or de­mo­graphic.

It is a cliché to say that the Covid-19 out­break has ac­cel­er­ated changes that were al­ready under way, but true none­the­less. On­line shop­ping was hap­pen­ing any­way, but has skipped a few years. Like­wise, work­ing from home. The tech­nol­ogy was al­ready avail­able, but the pan­demic has cre­ated the mind-shift that has made it not just ac­cept­able, but de­sir­able.

Put all this to­gether and in­vest­ing in prop­erty be­comes more like stock­pick­ing than the ex­er­cise in as­set al­lo­ca­tion it has tra­di­tion­ally been. Man­ag­ing an eq­uity port­fo­lio is part top-down, un­der­stand­ing the big themes and trends driv­ing mar­kets, and part bot­tom-up, pick­ing the right stocks. Man­ag­ing prop­erty re­quires a sim­i­lar ap­proach, get­ting ahead of the dis­rup­tive changes and putting the right ten­ants in your build­ings.

Di­ver­si­fi­ca­tion is key to suc­cess­ful stock mar­ket in­vest­ing. It re­duces risk and pro­vides a smoother ride. In prop­erty, di­ver­si­fi­ca­tion used to mean hav­ing a mix of re­tail, of­fices and in­dus­trial. Now it’s more about en­sur­ing you are ex­posed to a range of sec­tors and in­dus­tries so that you are not floored, as Intu has been, by prob­lems in one part of the econ­omy.

In a low-in­ter­est rate world, in which the abil­ity of com­pa­nies to pay a de­cent div­i­dend has been com­pro­mised by the pan­demic and bond yields are on the floor, com­mer­cial prop­erty will con­tinue to at­tract money from yield-starved in­vestors. But they will need to think a bit dif­fer­ently about what con­sti­tutes a prime port­fo­lio – less time look­ing at the pictures, more read­ing the notes to the ac­counts.

The Traf­ford Cen­tre is one of 17 high-pro­file shop­ping malls in the UK owned by trou­bled Intu

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