Amid the sweeping prophecies that life will never be the same post-pandemic, it is refreshing to hear a more cautious view. “I am a slight sceptic of the widespread assumption of ‘a new normal’,” says Mat Oakley, head of pan-European commercial property research at Savills. “We see such forecasts in every crisis; change will happen more slowly.”
“Commercial property is a simple asset class,” he says. “In an expansion, we need more space. Currently, we are in a thumping great recession, but I expect a not-quite V-shaped recovery in which GDP recovers quickly but unemployment doesn’t return to 2019 levels for five years.”
Property investment, now past the nadir, was 43% below the five-year average in the first half of 2020. But it was 51% down in 2008 and “the recovery will be better this time”. In the office market, vacancy rates are rising, there is downward pressure on rents and development starts are being delayed, but “we are not at the end of the cycle: the medium-term fundamentals remain good”. Less development will reduce vacancy rates and the pressure on rents.
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What about the shift to working from home? Oakley points out that home-working is suitable for some tasks (reading documents, focused work and video or phone calls), but “a lot of things work better in an office so offices won’t disappear”. Offices are better suited to team management, meetings and the informal chats or chance encounters that can spark fruitful new ideas and strategies for the company, a key factor in services and creative businesses. Surveys show a marked swing in favour of working from home, but from one day a week or less to two or three days a week – not to full-time.
Retail parks have been more defensive than shopping centres, with weekly footfall down 20% rather than 60%. Retail parks are well suited to “click and collect” services and returns, while they also offer social distancing. In the industrial market, the take-up of logistics space in the first half was the highest for 15 years, but this type of property “is not as safe as it seems”. When vacancy rates rise above 12%, as they did in 2009, rents fall.
The best real-estate bets on the continent
Marcus Phayre-Mudge, manager of TR Property Investment Trust (LSE: TRY), is not ready to buy into the UK yet. Only 28% of his portfolio is invested in listed British shares; another 7% in directly held properties and 64% in continental shares. Of the latter, 45% is in Germany and Austria and nearly all the rest in France, Benelux and Scandinavia. He is cautious about Britain because since December 2015 European property shares have returned 45% in sterling, but British ones -20%.
Within the UK, favoured areas are “beds, meds and sheds”: student accommodation, healthcare property and self-storage, companies that are UK-listed but have their assets in Europe and two specialist real estate investment trusts (Reits), Supermarket Income and Secure Income. Student accommodation and Secure Income, owning hotels and leisure attractions, have been poor performers. Progress on the directly held properties may open the way to asset disposals.
Though the share price is down 32% since February, its European focus means that performance is far ahead of the UK property sector over three and five years. The shares yield over 4%, trade on an attractive 13% discount to net asset value and, with a market value over £1bn, are highly liquid. Phayre-Mudge is positive: demand from tenants, “excluding non-food retail, should prove stable while a lack of supply, due to the absence of a development cycle in 2008-2014 and the current development cycle being deferred, means that there is no surplus of new space to undermine rents... Real estate, particularly where income is long and strong, will be an attractive investment”.
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