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
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