Interest rate hikes may have knocked LondonMetric Property’s valuations, but chief executive Andrew Jones is bullish that the fundamentals of its “all-weather” portfolio will stand it in good stead.
The listed investor posted a £243.5m IFRS loss in the six months ending September, on the back of a circa 8% fall in its portfolio value to around £3.5bn. However, growth in net rental income offset this decline, jumping by 13.5% to £72.1m.
Many investors might find it tricky to see past the challenges of operating in what Jones calls a “choppy” market. But Jones urges real estate players to remember that “market uncertainty is actually the friend of the investor looking for long-term value.”
Opportunities await
During the period, the REIT made £99m of acquisitions and offloaded £140m. “Over this period, we’ve been net sellers rather than acquirers – we’re not wedded to this sector or indeed to all of our assets,” says Jones.
Now, the pace of purchases and disposals will slow amid volatility in swap rates. Nonetheless, Jones says there are opportunities to take advantage of market dislocation and that the investor is in talks on acquisitions.
In particular, the REIT is looking at opportunities that have emerged on the back of open-ended retail funds facing redemptions – although the investor is “going to be greedy” on the price it will pay.
“The price we might have agreed back in the summer is going to be a bit different today – that’s just the market,” says Jones.
Occupier-wise, Jones says discount retailers such as B&M, Aldi and Lidl look set to perform particularly well in the current market climate.
“People will start trading down and look for bargains,” he said. As such, consumer changes in behaviour have meant that “convenience and value seems more important than experience at the moment”.
Secondary will lose out
Jones says that as the market readjusts, the greatest pain will be seen in sectors that face structural headwinds, are valued off the low yields and where rental growth is muted.
“You’ve got polarisation of performances across – and within – sectors,” says Jones. “Take Helical or GPE, which I call ‘upscalers’ – they’ll be fine, people want the best buildings. But second-hand offices look very exposed – outward yield shift and falling demand.
“Similarly, we focused on convenience and grocery – that’s feels a better place to be than shopping centres… [where] retailers are setting the terms. Landlords have no pricing control.”
According to Jones, some companies have suggested shopping centre yields have tightened in the period – a view that he dismisses. “Whatever land that person’s living in, I’d love to get a ticket because it’s just ludicrous – nobody’s dumb enough to want to buy a shopping centre in this market,” he says.
Jones adds: “At the end of the day, when you buy quality, time creates wealth. When you invest in secondary, time will destroy it.”
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