Property investments in 2018: firm foundations or built on clay?

18 months ago, in the immediate aftermath of the Brexit referendum, property funds went through a very difficult time. Investors, worried about the uncertain future, withdrew their money in droves and many funds had to temporarily cease trading.

The funds have since recovered and enjoyed a strong 2017, but given Brexit uncertainty is still very much shaping the UK's economic backdrop, do UK property investments hold any appeal?

Success is down to finding and developing properties with difficult-to-replicate – and often overlooked - competitive advantages, according to some of the industry's most successful property managers.

As consumers, for instance, we will often visit warehouse parks or order products online. But how much thought do we put into logistics and how the experience is made positive for the end customer?

John Danes, head of continental European property research at Aberdeen Asset Management, said 'last mile urban logistics units' – or warehouses close to city centres which store goods for customer delivery – are major beneficiaries of the e-commerce boom*.

“Parcel delivery volumes have doubled in the UK in the past six years due to the growth of online retailing. This forces logistics occupiers to be close to consumers in major cities to ensure speedy delivery,” he explained.

“As a consequence, retailers and e-commerce companies are investing heavily into urban logistics and spending less on, or in some cases closing, high street stores. We argue that the ‘shed’ is replacing the shop.”

Not only this, Danes pointed out that online retail requires three times the logistics space of traditional retailing to cater for returns. Given that London alone is growing by 1 million people per decade, he believes demand is set to continue increasing.

For physical shops, one of the biggest challenges facing them is of course this rise in e-commerce. Given how convenient it is to buy products online, regular shops are less likely to make the grade.

Andrew Hook, who heads up the Aviva Investors UK Property fund, said consumers are now looking for an overall experience when venturing out of the house to go shopping, and so getting the right balance of services, shops and facilities is key.

This is why he has invested in the re-purposing of the Manchester Corn Exchange – a grade II-listed former trading floor – which is in the process of being developed into a shopping centre.

It is currently in the second phase of its regeneration, which involves the addition of a 114-bedroom Roomzzz aparthotel. The Aviva team's aim is for the below shops and restaurants to be able to deliver to the above rooms, thereby attracting more consumers to use the hotel facilities and, in turn, the shopping and dining facilities.

In an article published on the Chelsea website last month, co-manager of Henderson UK Property Ainslie McLennan said the high street is simply no longer attractive and instead prefers the diversity of outlets offered by retail parks.

“Aldi, for example, is a great pull and if you have refreshments close by, shoppers linger for longer,” she said. “We're also looking to the future and installing electric chargers in car parks, which should also attract more visitors.”

Fiona Rowley, manager of the £3.7bn M&G Property Portfolio, also has exposure to retail buildings but warned that it pays to be selective, given the rise of online retailing.

For instance, she owns Bridgend Designer Outlet** – which is regionally dominant and has an annual footfall of 3.8 million; Fountain House in Belfast which is well-configured and in a good location; and Lincoln-based Lindis Retail Park, which is home to a flagship branch of Sainsbury's.

Rowley also holds approximately one-third of the portfolio in office buildings**. Again, she said it is about spotting the competitive advantages which will keep the business employees happy and encourage them to rent the space for longer.

The manager also pointed out that some office fixtures and fittings are paramount in order to attract tenants but can easily get overlooked – such as shower and bike storage facilities.

For instance, she holds 3 Hardman Square in Manchester** within the fund, which is an office building arranged over 10 floors (including basement parking) and is 178,148 square feet in size. It is grade A-rated which, according to the Building Owners and Managers Association***, means it has high-quality standard finishes, state-of-the-art systems and exceptional accessibility.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Lauren's views are her own and do not constitute financial advice.

*Source: Aberdeen Asset Management. Thinking Aloud, December 2017

**Source: M&G Property Portfolio brochure – Property Case Studies, September 2017.

*** Source: BOMA International, December 2017

Published on 04/01/2018