Darius McDermott: Making sense of UK real estate

The past 12 months has reinforced the view real estate still plays a fundamental part in a diversified 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. If they do return to anywhere near pre-crisis levels – and it’s a big if – it’s likely to take some time.

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. It went on to say that three sectors – office, retail and hospitality – were in the eye of the storm as a result of these structural changes courtesy of the pandemic.

Property adviser CBRE agrees that while the “profundity of structural change is often exaggerated” some of these accelerations do seem likely to have been so dramatic as to amount to a permanent reset – think about people walking from home more and the closing of retail stores as an example. Essentially no UK worker, employer, consumer, homeowner or renter will return to their pre-pandemic habits*. However, CBRE does believe 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 – citing changing consumer demands pushing the logistics property sector to record levels*.

TR Property Investment Trust manager Marcus Phayre-Mudge says that despite the negative headlines, it’s important to remember that real estate is an exceptionally diverse asset class which warrants a place in a well-diversified portfolio. 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.

He says the diverse range of listed property companies enables managers to focus exposure on sub-sectors that are enjoying positive demand/supply characteristics. Importantly, where there are challenges there are opportunities. He cites rising rents for logistics and light industrials across all of Europe as an example of this – pointing to the increased demand for storage space due to a combination of more online shopping, shortened supply chains and less reliance on ‘just in time’ delivery.

Diversity is an important point – which I feel is sometimes overlooked. Gone are the days when real estate was just a combination of office, retail and industrial sectors – you can add the likes of logistics, residential, hotel & hospitality, care homes and digital infrastructure into the mix. For example, Time Commercial Long Income fund manager Nigel Ashfield shifted his portfolio toward the logistics sector and no longer has any allocation to office space.

See also: Has the e-commerce boom made warehouses and distribution sites hot property?

Janus Henderson UK Property PAIF managers Ainslie McLennan and Marcus Langlands Pearse believe 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. The pair are particularly bullish on retail warehousing, pointing to the size of these units making it easy to social distance; adding that supermarkets have also been a beneficiary of lockdown.

We’ve been taking advantage of the opportunities in this space since last summer through closed-ended structures, as we felt it allowed managers to focus on asset management without any worries about redemptions – on the back of a distressed period following the pandemic-induced sell-off. Many of those closed-ended structures were also able to use gearing and, importantly for our VT Chelsea Managed funds range, a number of them were trading at attractive discounts.

Many of those discounts have now substantially narrowed, but there are still select opportunities – and importantly, the yields are still attractive. A good example would the AEW UK Reit, which has done extremely well for us on the performance front and, although the discount has narrowed markedly, it still yields 7.7%, which is excellent in this climate**. And investment in TR Property resulted in a similar outcome.

For me, it is all about selectivity. There will be opportunities, but the easy money has been made. However, the past 12 months has reinforced the view that real estate as an asset class still plays a fundamental part in a diversified portfolio.

*CBRE Research – UK Real Estate Market Outlook

**Source: The AIC – figures taken at 24 August 2021

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