What does that mean in practice? Well, at the sector level we currently have a relative avoidance of UK retail. It’s a stance we’ve maintained for some time and a sensible one given the challenges the high street is facing from the shift in purchasing patterns to online shopping – a trend that COVID-19 has accelerated. Owners of high street property and shopping centres are being impacted by tenants struggling to maintain rent payments and who mostly need fewer units to trade from and this has led to plummeting asset values. The flip side is the opportunity and growth for online retailers which in turn supports firm demand for logistics premises or ‘sheds’ as they’re often called. We have a big overweight here. Another overweight is the German residential sector with the strongest incumbent firms boasting near 100% occupancy rates and offering a sustainable and attractive income stream.
The portfolio’s allocation to UK physical property exposure is smaller – our long-term range is up to 15% but it currently stands at around 8%. As in equities, careful targeting of locations and active management is key. Sector wise, industrials and logistics assets where the supply/demand dynamic is favourable are our preferred locations whilst elsewhere we look to create value through development that taps into longer-term regeneration trends. In Bayswater for example, the redevelopment of a supermarket let to Waitrose resulted in an extended lease, higher rent per square foot and additional lettable space within the building. Elsewhere, we’ve received permission to transform a well-located industrial estate in Wandsworth into a new residential/office and light industrial development.
Where from here?
There isn’t a sector of the economy that hasn’t been impacted by COVID-19 but its influence on some areas of the property market has been particularly acute. Looking forward, its full impact is hard to gauge but it will likely mean central banks and governments will remain on the front foot in terms of stimulus and support. Against this backdrop, long and strong income will be an increasingly valuable commodity and the sub-sectors that can provide it will likely continue to outperform. In our view that means select residential, supermarkets, healthcare and logistics assets. Retail, meanwhile, looks set to continue to be hampered by structural headwinds despite the expectation that a vaccine will rapidly assist in returning consumer behaviour to a more normal environment. We expect this evolution in omni-channel retailing to become the new normal.