Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The first signs of a release in pent-up consumer demand arrived on our high streets this week, with customers queuing round the block for the reopening of stores such as Primark and Debenhams. For the latter, and a number of businesses like them, a normalisation of conditions on the high street will arrive too late. For others though, the future reshaping of retail facilities will present opportunity and a chance to gain market share.
For commercial property owners too, the year ahead promises the return of improved trading conditions, in stark contrast to the environment that laid waste to the retail property giant Intu last June. Rents have been a major issue during lockdown, with shuttered businesses in the retail and hospitality sectors being less able or willing to keep up payments.
Difficult discussions between landlords and tenants have been commonplace. Last week, Land Securities, the UK’s largest property development and investment company, said it had allocated £39 million in rent concessions to customers since last April¹.
Conditions are expected to improve by the summer though, after retailers in Scotland reopen, trade picks up and as the government’s moratorium on evicting non-paying tenants comes to an end on 30 June. British Land reported this week that, after the shutters were raised on non-essential shops in England and Wales on Monday, 79% of its stores were now open².
Even through lockdown, there were some bright areas. Events last year opened a Pandora’s box of online shopping, leading to a sharp rise in demand for warehousing and fulfilment facilities, which partly counteracted the effects of sales drying up for non-essential retailers, offices and hotels.
UK online retail sales as a proportion of overall sales hit a new peak in January of 36.3%, considerably up on the 20.2% recorded in the same month a year before³. Unsurprisingly, perhaps, prime “big box” logistics units – grade “A” warehouses of 100,000 sq ft and over – achieved record rents in 2020, even as the shockwaves of the pandemic spread through shops and offices⁴.
Quite how far the demand for commercial property has been changed forever remains a hot topic for debate. The demand for human interactions in workplaces, retail and leisure activities will presumably bounce back once restrictions ease. On the other hand, advances in technology have made further shifts to online shopping and home working possible and technological change has a habit of being hard to reverse.
The ONS reported a small rise in working adults leaving home for work at the start of this month, but 41% were still either working exclusively or part of the time from home⁵. Even if only part of this number reflects a structural shift – and anecdotal evidence of city workers moving to rural areas during the pandemic suggests this is the case – a repurposing of some office space will probably be needed.
While considerably down on last year, the income available from commercial real estate investments remains competitive versus the income available from government and corporate bonds. Moreover, rent deferrals as opposed to cancellations during lockdown suggest some landlords could benefit from additional revenues as the economy reopens.
With the prospect that rents will firm up as the pressures on tenants ease in a post-Covid world, commercial property remains a potentially attractive way of achieving a more diverse investment income. Great change lies ahead as demand patterns continue to evolve, but that change will undoubtedly bring opportunity.
It’s worth noting that pressures on the sector in 2020 laid bare the shortcomings of open-ended funds invested directly in commercial properties. While such funds routinely retain a proportion of their assets in cash in order to satisfy sales made by their investors, the mismatch between daily fund dealings and property assets that generally take time to sell can raise difficulties. A number of funds closed their doors to redemptions last March as a defence against possible waves of selling and in response to uncertainties over the correct valuations to apply to underutilised buildings. Several remain closed too.
Property investment trusts have the advantage of being closed ended, meaning they have no need to dispose of properties when investors sell their shares. Even so, the shares of trusts like these can be very volatile, being exposed daily to swings in investor sentiment. Some currently trade at discounts to their net asset values of close to 30%, while others, including Supermarket Income REIT and Warehouse REIT, trade at significant premiums⁶.
Fidelity’s Select 50 list of favourite funds includes the iShares Global Property Securities Equity Index Fund. This fund has a very broad spread of commercial property exposure that includes retail, industrial, office and residential property as well as hotels and real estate service companies.
The fund avoids many of the liquidity issues that can arise from investing in commercial property directly by purchasing the shares of property investment companies included in the FTSE EPRA Nareit Global Real Estate Index. The Fund’s largest holdings are currently the US logistics and global supply chain specialist Prologis; Digital Realty Trust, another US company that invests in digital data centres; and the self storage rentals company, Public Storage. The fund yields 2.1% currently, an amount that can rise and fall and is not guaranteed⁷.
¹ Land Securities Group, 13.04.21
² British Land, 14.04.21
³' ⁵ ONS, 09.04.21 and 06.04.21
⁴ CBRE Research UK, December 2020
⁶ AIC, 14.04.21
⁷ BlackRock, 14.04.21
Investors should note that the views expressed may no longer be current and may have already been acted upon. Property and land can be difficult to sell so an investor may not be able to sell this investment when they want to. The value of property is generally a matter of a valuer's opinion rather than fact. Shares in investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. They can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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