COMMENT It was perhaps inevitable that in the face of “late cycle” concerns, protracted political uncertainty and conflicting economic indicators, a substantial segment of commercial property investors would look for more “defensive” asset selection.
Interviewed by EG recently, Ric Lewis of Tristan Capital had a different name for this strategy and talked about assembling an “all-weather” portfolio. When asked what this equated to in terms of stock, he said: “It’s a matter of shaping the portfolio to be good, institutional quality and in some cases taking on less risk on average for a little less return.” Certainly an approach that nobody could quibble with in the current economic climate.
This is a trend that we are seeing in the commercial property auction room. It is not that the more entrepreneurial buying geared to active management has stopped, but there is a growing trend for investors to target assets which tick every box in terms of lease length, covenant, location and sector.
A good example of this from our most recent auction was a shop and upper parts on Holloway Road, N7, let to Vodafone until 2026 at an annual rent of £53,500, which sold for £1.13m at a yield of 4.4%.
“It is not that the more entrepreneurial buying geared to active management has stopped, but there is a growing trend for investors to target assets which tick every box in terms of lease length, covenant, location and sector.”
Of these key metrics, perhaps lease length is the most pivotal as it represents the duration of income security. Our Commercial Property Auction Data research analysis shows demand for short-lease-length assets waning for a number of quarters, and drove the average yield for this type of asset up by 20bps in Q4 2018. At the same time, there was a marked increase in demand for long-term-income assets, with average yields moving inwards by 27bps.
For this reason, the slight paradox of this supposed late-cycle phase is that you see average sale yields sharpening as investors cluster around the restricted number of higher quality properties that fit their investment criteria and discount anything which is perceived to have a fault line in its investment case. In the same context, the percentage of properties that sell, while being high, is also volatile as the investment calculations oscillate in response to the ever-changing political sentiment.
For the buyer who is looking for the ultimate failsafe feature underpinning their purchase, there also has to be a potential higher-value alternative use. The market has already seen how the permitted development rights regime was able to wave a magic wand over huge swathes of redundant regional office buildings and turn them into lucrative housing complexes. A Wyevale garden centre investment where we acted for a global investment asset manager provoked huge interest. A lease until 2030, RPI increases and investment value underpinned by alternative use.
This drive towards potential alternative uses is particularly pertinent in the retail sector, which still accounts for the majority of stock that flows through UK commercial property auctions. There is, of course, a huge debate about what the future holds for the high street and physical retailing in general, but it is fascinating to see the polarity of attitudes.
Glass half empty or half full?
Perhaps the best example of this is around secondary shopping centres. In essence, there appears to be one camp that sees these assets as simply “failed shopping centres”, while another views them for their fundamentals: large in-town sites with some short-term income, good parking facilities and usually a local authority that is keen to see their regeneration through creative reinvention. Very much a case of glass half empty or half full. What is clear is that the new owners of many of these shopping centres will not be coming from traditional sources.
The political will behind this reinvention is clear. Last month, the Housing, Communities and Local Government committee said that, without reform, formerly thriving shopping areas “are likely to become ghost towns and effectively close down altogether”. The High Streets and Town Centres in 2030 report also calls for a further review of the business rates system and an overhaul of planning law to make changes of use easier.
So, while we are likely to see defensive stock selection proliferate in the short-term, there are other forces at work that should mean investors who have more appetite for risk may be able to capitalise on very different opportunities. In these instances, attacking the received wisdom around what the future holds for an asset will be the best form of defence.
Richard Auterac is chairman of Acuitus
