For the past few years, the commercial property sector has been an investment no-go zone, ravaged by higher interest rates, inflation and the pandemic’s impact on shopping and working.
The general disquiet was highlighted this week by the cancellation of the stock market launch of Special Opportunities, a Reit (real estate investment trust) which was aiming to acquire ‘very high-quality’ properties at rock-bottom prices from distressed sellers and pension funds seeking to ‘de-risk’.
But if you have long horizons and an appetite for risk, you may find this an opportune moment to examine the opportunities.
Opportune moment?: Office blocks are seen as an area worth exploring – but only so long as they have tip-top technology and impeccable green credentials
Office blocks, for example, are seen as an area worth exploring – but only so long as they have tip-top technology and impeccable green credentials.
Also essential are the ‘office peacocking’ features that make a workplace a lot more appealing than working from home.
These include roof terraces and luxurious shower and other ‘end-of-trip’ facilities.
Tenants are increasingly demanding such upgrades. In April, £900million-plus was wiped off the value of the Canary Wharf towers in London Docklands, largely because the accommodation is viewed by some as outdated.
Mark Allan, chief executive of the Land Securities Reit, which owns the lights of Piccadilly Circus and suitably glossy and planet-friendly offices in Victoria, says that ‘macroeconomic signals look more encouraging than they have for a while.
He adds: ‘The value of high-quality assets has largely bottomed out and will start to grow in the foreseeable future as rents rise.’
Some long-established Reits are already on the prowl.
They include the data centre and warehouse giant Segro (formerly known as Slough Estates), and Derwent whose portfolio encompasses blocks in Fitzrovia, near London’s West End.
This neighbourhood north of Oxford Street was described to me by one estate agent as the ‘on-fire’ office market.
Fitzrovia’s bars, coffee shops and Victorian streets have the ‘vibe’ required to entice Gen Z workers.
Private equity groups are also swooping on office blocks and other bargains, while UK, US and European institutions like Aviva, Axa, Brookfield, M&G and PGIM, a division of insurance giant Prudential, seem to reckon the worst is over.
They are lending to real estate businesses, with a focus on data centres, logistics – and, of course, those upmarket office buildings. If this sounds like a territory into which you would like to venture, this is what you need to know.
CAUTION BEFORE ENTERING
Sentiment may have shifted, but the backdrop remains challenging with the possibility of more shocks.
As a result, the average discount between the share price of a Reit and its net asset value has lately been as wide as 50 per cent, according to figures from the Association of Investment Companies (AIC).
Although this appears to present a golden opportunity, Darius McDermott of FundCalibre emphasises that not all Reits are bargains. He stresses the importance of ‘sector focus’.
There is more clamour for logistics sheds than high street units, which should ensure that the trust has sufficient cash flow in the form of rents to fund payouts – 90 per cent of a Reit’s income must be distributed in dividends.
MERGER MANIA
Some Reits have been wound down and others are seeking mergers to gain the scale necessary to thrive and survive.
Last month UK Commercial Property Reit was acquired by Tritax Big Box.
But such is the optimism for the newly-enlarged £4billionn logistics behemoth – whose tenants include Amazon and Argos – that brokers Jefferies rate Tritax Big Box a ‘buy’ with a target price of 201p, against the current 152p.
THE PROFESSIONALS CHOICE
Richard Williams of analytics group QuotedData likes Urban Logistics Reit, which is trading on a discount of 27 per cent and specialises in the smaller warehouses that serve the ‘last mile’ of the supply chain between a company and its customers.
It’s a segment of the warehouse sector that is ‘vastly under-supplied’, according to Williams.
TR Property Investment Trust has stakes in Land Securities, London Metric, Segro and a vast array of other varied Reits in UK and Europe. The trust is managed by Marcus Phayre-Mudge.
Ben Yearsley of Shore Financial Planning says: ‘I would rather leave the choice to Marcus.’
Since TR Property is at a mere 8 per cent discount, you may not be snapping up a bargain.
But you will be enjoying the services of a guide in an area that may be exciting but is still strewn with hazards.
