However, not all sectors have been impacted in the same manner. Retail remains severely challenged with rent collection under significant pressure. The expected deterioration in the leisure, food & beverage, student accommodation and hospitality sectors has started to feed through into the overall numbers. This is reflected in the aggregated ‘Alternatives’ performance, with the strongly negative performance of some of these groups shielded by more favourable alternatives subsectors. Industrials & logistics, healthcare and residential build-to-rent have remained relatively resilient with continued, albeit reduced, deal flow.
The Trust is diversified by sector and geography, with a high weighting to the South East and not far off double the benchmark index weighting to industrials, owns no shopping centres or department stores, no leisure assets (gyms, cinemas etc) or hotels. 11 retail assets have been sold since 2016. Retail warehouse exposure is let to functional, non-fashion occupiers, and only one retail asset appears in the top ten holdings.
Income is well diversified, with relative risk ranking verses the benchmark index improving over the year: eight of the top 10 tenants are ranked as negligible or low risk (by performance monitor MSCI). The portfolio has less vacancy, less overrent and less development exposure than the Index.
As at 18th June, the Trust had collected over 89% of rents due for the March to June quarter, with further recovery prior to the end of June expected under payment plans. Absence of shopping centres, leisure, student accommodation and hospitality, as well as minimal exposure to food & beverage has assisted the collection rates. Most tenants are paying something, although with a number switching to monthly rents. The government moratorium to June on affirmative action against non-paying tenants has altered behaviours, even for those tenants that have the means to pay. It remains to be seen whether the recently released ‘Code’ of behaviour will affect collection in June though we expect the environment to remain particularly challenging.
The future path of returns is highly uncertain, but capital values and rents will be under pressure over the near term at least. However, it is important to distinguish short-termism from embedded structural challenges. Behavioural challenges are evident in the retail, office, leisure and hospitality markets: the digitalisation of the economy is accelerating structural change, and as well as challenges, opportunities will present themselves. Polarisation likely to persist, and therefore sector and stock selection of increasing importance. We favour industrial/distribution and offices plus some selected alternatives. Retail continues as the laggard though there remains scope for income-led returns once values and rents rebase, though this could take some time. Retail warehousing may present an opportunity, but the prospects for leisure, hospitality and student accommodation look uniquely challenged for now.
With all of this in mind, our current strategic aims include:
Past performance should not be seen as an indication of future performance. If markets fall, gearing can magnify the negative impact on performance. The value of directly held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.