It is clear that no one really knows the correlation between China, falling oil prices and UK real estate, with the result that investors are more nervous and less confident.
However, it always pays to listen to Nick Leslau. In his recent EG column (30 January, p58) he suggested it was time “to start sweating income assets – the glory days of guaranteed capital growth are over for now”.
Sweating income assets is what we do at Ellandi. Not for us the glory of booming West End capital values; we aim to be custodians of income and when it comes to generating free cash and dividend yield, things look quite rosy in our garden.
Our sole focus is UK community shopping centres where high initial yields, the low cost of debt and a rapidly strengthening occupational market are producing very attractive cash-on-cash returns. The three assets we have bought over the past two months are returning more than 10%.
The key factor in focusing on higher-yielding assets is the sustainability of the income. Is the attractive yield only a temporal mirage? Will income be eroded by a global recession, the internet or the much-trumpeted death of the UK high street?
From analysis of our 7m sq ft portfolio, comprising more than 2,000 tenants and 165m visitors a year, we are seeing many reasons to be positive rather than fearful. We completed 112 lettings in 2015 and reduced our vacancy rate by 8%. Our occupancy rate now stands at 95% – broadly comparable to the prime shopping centres owned by the UK REITs.
Our shoppers do not fixate on international financial markets or commodity prices. These issues may dominate the FT, but they don’t influence whether a family needs to buy new school shoes, visit the chemist or top up on colouring books for a wet weekend. Community shopping centres rely on normal people living normal lives and spending money on everyday items.
In this respect, the UK is in good shape. GDP growth is not roaring ahead, but it is positive and we have high employment, low inflation, low interest rates, rising house prices and reasonable availability of consumer credit. These factors combine to create high levels of consumer confidence.
We also have one of the fastest-growing populations in Europe, projected to increase by 21% by 2050. Much of this growth is by way of an ageing population, which puts stress on societal infrastructure but also supports local and discount shopping patterns.
“The UK consumer is a relatively bright spot,” says Mark Dampier, head of research at Hargreaves Lansdown. The UK is among the healthiest sub-sets of the European economy. ONS figures show that retail sales rose by 5% year-on-year in November 2015, the 32nd consecutive month of growth.
These macro factors create a positive backdrop for UK retail. Of course, we must be aware of changing shopping patterns and the internet is very disruptive. Yet, those who truly understand e-commerce realise that it will not replace the need for local, convenient and community-focused shopping. Research from Ipsos and the British Property Federation found that 83% of people prefer to buy certain goods locally, 75% visit the high street at least once a week and 92% at least once a month. Typically, community shopping centres have high-frequency, low-value shopping visits; a basket of low-value items that consumers want immediately is not practical to procure online.
We can see from our portfolio that we are in the early stages of an occupational recovery. There is increased tenant demand for space in dominant local shopping centres, where occupational costs are conducive to positive trading margins.
Given the precipitous fall in rents from 2007 onwards (up to 60% reduction in certain schemes), some locations are now eminently affordable and we expect rental growth in our portfolio from cyclical low levels. (Although it must be noted that careful stock selection is required to identify and avoid schemes that are heavily over-rented and where tenant demand remains weak).
We are quietly confident that within community shopping centres, income is not only robust at current levels but will see medium-term growth.
If there is to be a switch in focus from hunting for capital growth towards cash-generating properties that offer high and sustainable dividend yield, then community shopping centres should become as desirable as West End offices… sorry, I have gone too far – I’d better read the FT to calm myself down.
Morgan Garfield, managing director, Ellandi
