GB-EN Intermediary

Property in the pandemic and beyond – an accelerated shift to higher quality and ESG

How will the property sector look going forward?
August 2021

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Risk Disclaimer

The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.

The value of directly held property and property related securities reflect 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.

TR Property is able to borrow to raise further funds for investment purposes if the fund manager and the board of directors consider that it may be commercially advantageous to do so. This is generally described as “gearing”. An investment trust which has made investments as a result of gearing may have a more volatile share price as a result; gearing can increase shareholder returns in rising markets but conversely can increase the extent to which the value of the funds attributable to shareholders decreases in falling markets.

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.

What a time it’s been. During an extremely tricky period over the past year or so, we stuck with our core convictions across pan-European property and remained overweight in parts of the market that have held up well.

This has included European industrials and supermarkets, as well as the German residential sector – which has benefited from 100% occupancy and fully paid-up rents during the pandemic. Self-storage also performed very well as businesses have wanted to shorten their supply chains and keep more of their equipment/inventory closer to where they need it. During the worst of the pandemic, UK and European healthcare performed well and post the vaccine announcements in Q4 2020 we increased our exposure to European shopping centres and Scandinavian offices which have performed well.

We discovered that there was a very strong correlation during the pandemic between commuting time to work and whether travel was overground or underground. Those cities, effectively London and Paris, that experienced the greatest commuting times have also seen the lowest rates of staff returning to the office. While workers may have realised the benefits of being in the office, they didn’t want to travel.

What we found in smaller cities, such as Stockholm, Oslo or Berlin, was that employees went back very quickly. These cities had very high levels of occupancy and rents didn’t fall, while in London they are edging down for older buildings. For new Grade A space, we are seeing strong demand and no weakness in rents. This applies across all European cities.

Getting physical

We would like the physical property component of the portfolio to account for more than 10% of the asset base. Brokers know we are buyers and sellers, and therefore offer us opportunities; we like to keep an eye on the physical market.

Of particular interest have been retail warehouses and the opportunities thrown up by ‘click and collect’. The owner-operators of these warehouses – all easy to get to and with free parking – have discovered that when consumers come to collect their goods, they tend to browse and make other purchases.

We have stuck with our logistics/industrial play, with businesses that are building small, mid-sized and large warehouses, all over Europe. There is a supply-chain revolution going on, accelerated by the pandemic, as businesses change the way that materials are brought into Europe and respond to the increased demand from online orders.

The outlook

Going forward, we are all aware that Covid has accelerated shifts in retail and the drive for flexible office accommodation. But there is also a very big emphasis on creating high-quality working environments – with gyms, places to store bikes and electric scooters, windows that open – and on environmental, social and governance (ESG) issues.

Businesses are also likely to realise that their most important assets go up and down in the lifts each day, and that they will need to incentivise their people to come back in. For cities, such as London and Paris, the big shift is going to be de-densifying the workspace – you can’t just squish large amounts of people in anymore.

Regarding ESG, we have been busy working through a huge amount of metrics on our companies. It’s difficult to compare a company such as Tritax Big Box, where the entire portfolio is less than 10 years old, with an operation like Vonovia, a German residential business with 400,000 apartments, the vast majority of which were built between 1950 and 1980, and require a huge amount of work to improve their energy efficiency.

The main question for us is: are they improving? Are they doing the right thing for their tenants, shareholders and the environment? Property contributes a lot to the ‘social’ in ESG, and we have a long track record of engaging with companies on governance and holding them to account.

Risk Disclaimer
The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.

The value of directly held property and property related securities reflect 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.

TR Property is able to borrow to raise further funds for investment purposes if the fund manager and the board of directors consider that it may be commercially advantageous to do so. This is generally described as “gearing”. An investment trust which has made investments as a result of gearing may have a more volatile share price as a result; gearing can increase shareholder returns in rising markets but conversely can increase the extent to which the value of the funds attributable to shareholders decreases in falling markets.

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.

Subscribe to our insights

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