More than one-third of UK real estate investors (35%) see long-term residential investments as the best alternative to retail if they move out of the sector in the next year, new research has found.
After residential, 22% of investors each preferred either industrial or mixed-use properties as alternatives to retail for their portfolios, according to a survey conducted by MSCI Inc.
A further 11% of investors indicated that they would choose short-term residential as a possible substitute for retail.
MSCI said the survey highlighted how the slide in UK retail property valuations is reshaping attitudes on real estate sector allocations.
Since December 2007, valuations in retail property have decreased by 16.4% when accounting for net investment and capex. On the other hand, capital growth across all sectors on average has inched up by 0.7% over the same period.
MSCI noted this was driven by “much better performance” in other sectors such as residential, which posted capital growth of nearly 80% on a like-for-like basis.
However, investors said retail property offers certain characteristics that are not replicated by other investments.
Nearly one-third of investors said they would find it most difficult to replace the real rental growth of retail investments, while 26% said the availability of long leases would be hard to replicate.
A further 21% stated the benefits of inflation-tracking returns were a strong advantage of their retail property holdings.
Within the retail sector, there have been bright spots. MSCI said that standard shops in central London more than doubled in value over the same period, with capital growth of 124%.
Supermarkets have also enjoyed positive capital growth, but on a more modest scale of 9.7%.
While there is no doubt e-commerce is “severely” affecting certain sections of the retail property market, other sections have so far avoided any impact on capital values.
MSCI’s head of client coverage EMEA, Ken O’Brien, said: “UK retail valuations have been going through a sustained period of decline since the global financial crisis, and brief rallies haven’t repaired the overall trend, led by the shifting shopping and spending patterns of consumers.
“Through this period, retail has remained a significant part of portfolios, but if the market trend continues, investors may choose to consider other, more resilient options.
“Although it may be difficult to exactly replicate the positive attributes that successful retail investments historically provided, the changing real estate landscape does provide other options; whether that be the growth in multi-use developments or the inflation-hedging characteristics of residential assets.”
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