25 November 2020
- Challenges ahead for UK property investors – particularly in the funds that institutional investors tend to use.
- Andy’s piece on challenges for UK property from back in February 2020
- Trends accelerated by the pandemic: retail trend to online consumerism. UK property particularly exposed the 20-30% in retail, shopping centres and high street shops are looking challenged. Just too much shopping space in the UK.
- Has benchmarking of property funds also fed into this issue?
- The owner base of UK funds is also potentially concerning – DB scheme have been big investors but as these de-risk and liquidate holdings over time, this could be a challenge.
- Long-lease property funds most resilient eg investing in supermarkets.
- Retail bankruptcies data mentioned by Dan
- Covid-19 has accelerated the trend of changing land-use. The pressure is enough to put a lot of struggling retail business over the edge. But who could survive? Destination retail. Shops surrounded by entertainment and beverage. An experience where people want to go to meet and socialise, as well as shop. This is often the “blue chip” best quality retail properties out there.
Why global property?
- Global property expands your range of investment opportunities to a broader set, and by doing that you are better set up to deal with the structural challenges that we’re seeing.
- A typical global property portfolios looks pretty different to the UK.
- Global property funds are typically open ended, and a mature portfolio: the majority of return comes from income.
- Retail allocations are more like 15% in global property. This is often more in supermarkets, groceries and other necessity-based consumerism which is more resilient.
- The focus is global cities in more liquid developed markets.
- Offices are a big component of portfolios: in global cities, large CBDs, best-in-class sites that attract company HQ’s eg London, San Francisco, Melbourne, Munich, Paris.
- Global portfolios tend to have a much larger focus on “alternative” property sectors such as: residential. This is often in purpose-built rental accommodation, and in urban locations for those living and working in cities.
- The US property market is interesting – much larger role for REITs (listed) market and they have shifted into new sectors such as data centres, self-storage, student accommodation and elderly accommodation. They are beginning to feed through into the unlisted markets for the kind of funds we are looking at. These sectors are more on the right side of the demographic and structural changes we are seeing – so global property managers are better placed to access these.
- Worldwide property stock is at $30trn and the UK is 4-5% of that. The arguments for going from UK to global are similar to those for equity, it’s just that the available routes to global property for UK investors have improved.
The challenge of covering such a broad universe of private assets
- Property is a people business and your manager needs an established local presence across the globe; plus a way to knit it all together, cross-compare themes and opportunities before allocating.
Rights of landlords are a central theme to allocating
- It differs a lot across the world and state by state in the US.
Property is driven by
- Occupier demand
Property investing is about identifying them and deploying your investment where you are most likely to benefit from those trends.
Key considerations from environmental, social angles becoming the lynchpin of a successful strategy
- For example offices. Prior to pandemic it was all about packing more people in. Now its about thinking about the experience of being in the office: better spaces for meeting, interacting with clients, more modern buildings, more light and better heating.
But what about the bear case for cities?
- Companies are using less offices in the future, people are moving out of cities and there are big run-ups in property prices already over the last 20 years which are looking fully priced.
- It’s about the demand for people going into the office and collaborating – the world won’t settle close to being 100% remote.
- Allocate the right kind of offices that will be in demand for tenants – large blue chip corporates. Distinguishing between those that will work in a post-Covid world and those that won’t.
The pros and cons of the listed vs unlisted markets
- Listed – good dividend yields. Another way to access global property and benefits from a lot of the themes discussed. In the US c50% focused on alternative sectors. Daily priced and marked to market so they do tend to be volatile and correlated to equities. Liquidity is another attraction – it can go in/out and rebalance easily.
- Unlisted – unit trusts (usually open ended –/ quarterly dealing) valuations appraisal based, gives a smoothing effect to returns.
One thing to take away
- Follow your instinct, it is quite established in other asset classes that global makes more sense. The same mindset works in property, and also options exist now that didn’t 5 years ago to do this
Most under-appreciated thing about investment
- What it means to be a long-term investor. For illiquid asset classes you can’t get in/out easily so you have to take a long-term view, which is hard with all the noise. The requirement for regular valuations can actually create issues. Have the confidence to look through the short term noise.
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