Fund managers address the challenges facing the sector and the funds investing in it.
After urging people back to work, now the government has U-turned and told employees to work from home for a further six months as the pandemic intensifies. With city centres deserted and office blocks empty, what does the future hold for commercial property? The Association of Investment Companies (AIC) asked UK commercial property investment trust managers for their views on the challenges facing the sector, and the funds investing in it.
The future of the office
Central London offices are not done for, even with the huge pressures that they are currently facing, argues Richard Shepherd-Cross, manager of Custodian REIT (LSE:CREI). “Betting against central London has not worked for anyone over the last 20 years, so by hook or by crook I suspect it will survive as an office location. That said, the days of the five-day-a-week commute into a central London office are perhaps behind us.”
Shepherd-Cross points to remote working from home and suburban or regional “satellite” offices as a trend that will stick, and says that he would back regional offices in towns where people actually want to live. University cities such as Cambridge, Oxford, Bristol and York will be in demand for professional and service sectors because of their “high-quality built environment and access to open space”.
Poorer quality offices will become much harder to let and will suffer the greatest rental and capital value decline, adds Jason Baggaley, manager of the Standard Life Investments Property Income (LSE:SLI) trust. “Our expectations are that central London and the West End in particular will be hardest hit, as long and expensive commutes will increase the desire to work from home. Generally, we expect city and town centres to remain more popular than out-of-town offices, and that car-based commuting will only be a short-term solution.”
The conversion of unused office space into hotels and residential units is likely to continue, although hotel demand will remain soft for some time, Baggaley adds.
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Open-ended property funds
Shuttered open-ended property funds have begun reopening and, from today, new FCA rules require them to suspend dealing if there is material uncertainty over assets worth 20% of the fund’s value. The regulator is also consulting on whether to introduce notice periods for investor withdrawals.
Calum Bruce, manager of Ediston Property, says such a rule would be the death knell for open-ended property funds. “The FCA’s recommendations are a step towards addressing the fact that illiquid assets simply do not belong in open-ended funds. The lengthy redemption notice periods proposed by the FCA will effectively kill the viability of open-ended property funds for investors and turn attention to property investment trusts, which have long been superior vehicles for liquidity, performance and income. Fundamentally, the open-ended structure is not suitable for holding illiquid assets such as property.”
Fund managers say that they have agreed rent deferment, write-offs and repayment plans to help business tenants that are in financial difficulty because of Covid.
“In common with most landlords, we have supported tenants with rent deferrals, rent-free periods as part of lease renegotiations and in isolated cases have considered rent concessions,” says Shepherd-Cross. However, some tenants have been taking advantage of the situation to avoid rent they could pay, says Bruce. “Unfortunately, several well-capitalised businesses, which can afford to pay their rent, are taking advantage of the pandemic and are choosing not to pay any rent. A landlord’s ability to pursue these arrears is fettered because of the government-imposed moratorium on the use of the usual arrears recovery methods, which has recently been extended and will be in place until at least the end of 2020,” he says.
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The future of retail
Town centre retail is oversupplied, and rents are reacting accordingly, while convenience-led retail warehouses are proving more resilient, the managers say.
“During lockdown several out-of-town retailers were able to stay open for trade as they were classed as providing ‘essential services’ by the government,” explains Bruce. “As lockdown restrictions were lifted, but social distancing continued, the attributes of out-of-town retail parks appealed to customers, as evidenced by higher footfall numbers.”
Shepherd-Cross suggests that, in years to come, retail town centres are likely to be smaller “but with a wider range of local operators, previously pushed out by the national multiple chains, and a strong mix of retail and leisure”.
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