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.
That the pandemic has ‘accelerated pre-existing trends’ is by now a cliché most say through gritted teeth. Lots of us hated to admit that our lives were growing increasingly dependent on technology. After 2020, we had little choice.
One such regrettable trend has been the decimation of the high street. I grew up in a small town in the Midlands and returning home recently was pretty harrowing. The high street has looked a bit thin on the ground ever since the BHS and a trail of smaller independent stores closed. Last month, I counted few survivors besides Poundland, Tesco and WH Smith.
Distressing for businesses, depressing for locals, worrying for commercial property investors. Results today from property giant Land Securities captured some of the latter’s anxieties. The FTSE 100 commercial property firm reported a loss for the 12 months ending 31 March of £1.39 billion, with revenue driven down 39.4% to £251 million.
Many of those pre-existing trends accelerated in tandem to drive down Landsec’s profits. The rise of online shopping in lieu of physical footfall hurt the company’s property portfolio. Many shops were unable to pay their rents and were protected by temporary laws from being evicted.
Offices, meanwhile, have been left deserted as white-collar workers migrated home over 2020. Those shifts have battered the company’s London-focused office portfolio.
So far, so bad. The only thing that went up in Landsec’s report was their dividend - interestingly, the company confirmed a full-year payment of 27.0p per share, up from 23.2p in 2020.
The increased dividend reflects chief executive, Mark Allan’s, more positive outlook. For Landsec, much hangs on the reopening. He explained: “We are now in the recovery phase. Government action to support the economy was swift and the speed of the ongoing vaccination programme impressive. As a result, there is the real prospect of a strong consumption led recovery across the remainder of 2021 and 2022.”
Investors may have reason to share Allan’s optimism. 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. Compared to the rock-bottom yields available on most bonds, yields on prime real estate assets look attractive. Many hover around 3-4%, often from the same companies whose bonds trade well below 1%.
Landsec sees now as a time to be selective. In today’s report, the company outlined their plans to branch further into retail spaces and expand its central London portfolio - odd, perhaps, given the backdrop from which these markets are emerging. But Landsec realises that far from dying out, these areas are simply morphing. That presents opportunities for a property manager.
For property investors, it’s important to see through the behavioural biases that could cloud your outlook. Recency bias may lead us to give greater weight to current trends such as levels of home working or online shopping than they warrant. Better to look at your investments without preconceived expectations - past performance, as ever, is unlikely to guide future returns.
At the same time, the pandemic has certainly brought to light fresh opportunities. One beneficiary of recent shifts has been the logistics sector. That’s largely because the rise of online shopping led to a sharp rise in demand for warehousing and fulfilment facilities. 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 offices. Assuming e-commerce is one of those pandemic trends that’s here to stay, warehouses are one area to watch.
For private investors, there are various ways to invest in commercial property. Perhaps the most conventional route is through open-ended funds, though lessons from 2020 should not be forgotten. Because property remains a relatively illiquid investment, several funds closed their doors to redemptions last March as a defence against possible waves of pandemic-induced selling. Many remain closed, with investors still locked in.
An alternative route is through real estate investment trusts (REITs) such as Land Securities. Being closed-ended, these don’t need to raise funds to meet investor redemptions, lessening the liquidity risk. At the same time, they can be more volatile, being exposed to daily swings in investor sentiment.
Our Select 50 choice of favourite investments features one property-focussed fund, the iShares Global Property Securities Equity Index Fund. This tracker fund is a low cost and liquid option for investors that would prefer to simply allocate to the broad sector efficiently and with diversification across geographies and sectors, including retail, industrial, office and residential property. It reduces the liquidity issue by purchasing the shares of property investment companies included in the FTSE EPRA Nareit Global Real Estate Index.
Important information: 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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