Quarterly Investment Bulletin Q2 2021

Quarterly Investment Bulletin Q2 2021

March ‐ JUNE 2021

 

Setting the scene

From March, the Roadmap out of lockdown began to be implemented. As a first step, children and students returned to attendance on‐site at schools and universities. Three weeks later outdoor sports facilities and open‐air swimming pools were once again permitted to open to the public.

Step 2 in April saw the opening of non‐essential retail, hairdressers and gyms. Hospitality venues were allowed to serve customers seated at tables outdoors. In May, under Step 3, indoor hospitality re‐opened along with cinemas, adult group sports and exercise classes. Sports venues were permitted to host up to 10,000 spectators.

The UK economy is estimated to have grown by almost 1% in May, the fourth consecutive month of growth, but remains more than 3% below pre‐coronavirus pandemic levels. The service sector also grew by 1% and hospitality grew by 37%.

Step 4 hyped as “Freedom Day” involving the lifting of all remaining pandemic restrictions was delayed but finally arrived on 19th July. But the headlines were more about increasing infection levels and pinged workers than re‐gained freedoms.

 

Commercial Real Estate

All Property 3-month Trend 12-month Trend
Total Return 3.9 ­ 9.1 ­
Capital Growth 2.6 ­ 3.4 ­
Rental Growth 0.4 ­ -0.7 ­
Source: MSCI

The UK’s commercial real estate market has been far more resilient in the face of the pandemic than was first feared in March/April 2020 after the introduction of Lockdown 1.0. All Property capital values fell just 6.6% between February and October 2020, which marked the bottom of the pandemic cycle. Since, October All Property capital values have recovered 4.2% although values still remain 2.7% below pre‐pandemic levels.

 

Offices

Total Returns 3-month 12-month
All Offices 0.9 1.1
Central London 1.1 2.3
Rest of South East 1.4 1.6
Rest of UK -0.2 0.1
Source: MSCI

Nominally, city centres and offices are allowed to open again. Employers have been asked plan a gradual return to workplaces. Before doing so they must carry out a complete risk assessment and provide adequate ventilation and more frequent cleaning. Visitors and customers may be asked to check in via an NHS QR code, but they can refuse to do so but employers must turn people away who are exhibiting symptoms.

“Stay home, protect the NHS, save lives” was replaced by “hands, face, space” and itself has now been replaced by the rather under whelming “keep life moving”. More than a little confusion surrounds the new pandemic management regime. People are no longer instructed to work from home unless they are one of the 620,000 people who have been “pinged” by the NHS COVID‐19 app or one of the 428,000 contacted by NHS Test and Trace and required to self‐isolate for ten days.

Face coverings are no longer mandatory. TfL will, however, insist that all passengers wear face coverings on tubes, buses overground and DLR. The Underground is carrying 60% fewer passengers than it did in February 2020 and TfL bus

journeys remain 37% below pre‐pandemic levels. Heathrow passenger numbers remain more than 80% down.

Grosvenor and Land Securities believe that office occupancy rates fell to 10% during the first lockdown but are now running at 35%. They also believe or rather hope there will be a gradual return towards fuller levels of occupancy after the summer holidays.

At the end of June Barclays said that its trading desks were running at about 60% to 70% occupancy. The bank also announced that it plans to close its 5 North Colonnade office and consolidate in its nearby headquarters building at One Churchill Place. Other banks including HSBC, Citigroup, Morgan Stanley and Credit Suisse are known to be reconsidering their office space requirements.

London’s office footprint looks set to decrease. Expectations are of a flight to quality as employers need to offer staff a reason to commute and facilities that will attract new talent. Buildings in transport hubs could be another beneficiary of post‐COVID working practices. Commuters might accept the risks associated with a journey into a main terminus but be reluctant to travel onwards via bus or tube.

The largest office investment transaction since the start of the pandemic completed in June as Canadian property investor, Brookfield paid £635 million to purchase 30 Fenchurch Street, EC3. The building is let to Accenture, QBE Insurance, Wells Fargo, RSA and Munich Re. The building was originally named Plantation Place but had its name changed as the Square Mile sought to distance itself from historic links to slavery It was developed by British Land on the site of Plantation House, built in 1935.

In the Rest of the UK, No.8 First Street, Manchester which is occupied by Gazprom, healthcare provider Lonza and engineering consultant WSP and others was bought by Israeli Ashtrom Properties for £82 million. In the 19th century the First Street site was home to the Gaythorn Gas Works. In the 20th century, the original office building on the site was occupied by the British Council before it was taken over by BT in 1997. This building was refurbished in 2007 at the same time a plan was implemented to redevelop the whole site which is now known as the First Street neighbourhood.

Italian Trulli

30 Fenchurch Street, EC3

 

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Quarterly Investment Bulletin Q2 2021

MARCH ‐ JUNE 2021

 

Retail

Total Returns 3-month 12-month
Retail 2.5 1.6
Central London shops -0.6 -8.6
SE shops -2.1 -10.6
RUK shops 0.6 -1.5
Shopping Centres -0.5 -12.5
Retail Warehouses 4.4 7.4
 
Source: MSCI

Step 2 of the roadmap out of lockdown has been a great benefit to the UK’s High Street. Retail sales in June were 23% higher than at the start of the year and internet sales as a percentage of all retail sales fell from 36% to 26%.

The barriers erected to foreign travel have encouraged many to holiday at home, boosting domestic sales. Fashion and footwear did well while the sun was out in the first half of June, while the start of Euro 2020 provided a boost for TVs, snack food and beer.

City centre retailers continue to suffer low footfall and spending as commuters and international tourist numbers remain well below pre‐pandemic levels. Consumer confidence in the next stage of the roadmap will be key to the ongoing recovery of the high street. Many customers are looking forward to a return to a more normal shopping experience, while others may be discouraged by changes to social distancing and face covering rules.

Comparing the first half of 2021 with the first half of 2019, Next reported sales growth of 9%. Exceptionally strong sales growth in Q2 was explained by pent‐up demand for adult clothing as people changed out of their lockdown joggers into smarter outfits for trips to the pub and restaurants.

The largest shopping centre transaction since the start of the pandemic completed in May when Ardent from the USA acquired the Touchwood Centre in Solihull from the original developer Lendlease for £90 million. The centre encompasses 650,000 sq. ft. and is anchored by the last remaining John Lewis in the West Midlands. It has a further 80 stores, more than 20 restaurants and a nine‐screen multiplex cinema. It first opened in 2001 with a build cost of £110 million.

Owners and occupiers continue to wrestle with the problem of over large retail portfolios. Land Securities has a regional retail portfolio worth £1.8bn including Bluewater, White Rose and Trinity Leeds and Westgate Oxford. The REIT is re‐evaluating the amount of retail space in its centres and in some cases looking at alternative uses such as residential and office.

In July, John Lewis (again) revealed plans to repurpose part of its estate. Over the next ten‐years, approximately 10,000 homes will be built to rent on car parks serving its shops, sites adjoining distribution centres and over the top of Waitrose supermarkets. Future residents of a John Lewis home will be able to hire furniture from the retailer as part of the rental arrangements, after the retailer had successfully trialled the concept. The developments will also feature Waitrose convenience stores.

 

Industrial

Total Returns 3-month 12-month
Industrials 7.8 23.4
London 7.3 26.1
Rest of South East 7.2 21.3
Rest of UK 7.9 21.9
 
Source: MSCI

Online shopping continues to drive the investment and occupational demand for industrial and logistics assets.

Industrial assets represented 28% of all investment transactions traded in the first half of the year. Historically, industrial has represented just 12% of all transactions.

The largest industrial investment transaction this year was Blackstone’s £161 million purchase of a 1 million sq. ft. Amazon fulfilment centre in Bardon, Leicestershire. This is likely to be the largest lot size for a single let distribution centre traded in the UK.

Last mile or Urban logistics are typically buildings or estates of between 5,000 and 100,000 sq. ft. located in proximity to major urban centres; with access to millions of the population in under an hour via an established road network. In Europe the two most expensive locations are, perhaps unsurprisingly, London and Paris.

These are the capital cities of two countries where online retail penetration is among the deepest. In the UK, online retail sales peaked at 36% in 2020, up from just below 20% pre‐ pandemic, and are forecast to level out at circa 25% after the artificial conditions of lockdown are removed.

France lags some way behind – just over 13% of goods are estimated to have been bought online in 2020 – but there are signs that the pandemic is accelerating changes in consumer behaviour. A survey by GlobalWebIndex conducted last year showed that 27% of consumers aged 16 to 64 planned to continue to shop more on‐line and less in‐store.

Moreover, they are both old cities, with dense centres bisected by rivers, and sprawling suburbs organised around uneven road and public transport networks. This urban footprint makes the movement of goods inherently challenging, and so increases the importance of well‐located last‐mile facilities.

The strong performance of the sector has persuaded some of the early movers to cash in. Valor Real Estate Partners, who describe themselves as “investors in logistics and industrial real estate across Europe”, have recently launched a £1 billion sale of two joint ventures with AIG, an American multinational finance and insurance corporation, formed in 2017 and 2018. The portfolio is focused on assets located around Paris and Greater London.

 

What next?

If the UK successfully moves beyond Lockdown 3.0 and the economy remains open thereafter, All Property total returns could reach 10% or more in 2021 and 8% in 2022 with an annualised average of 9% in the 3‐years ending December 2023. However, the usual caveats regarding uncertainty surrounding this central forecast remain.

All Property forecast – June 2021
  2021 2022 2023 2021-23
Total Return 11% 8% 8% 9%
Capital Growth 6% 4% 4% 5%
Rental Growth 0% 1% 2%
For further information, please contact:
Paul Morris

e: pmm@fletcherking.co.uk

t: 07771 816 347

Geoff Egan

e: ge@fletcherking.co.uk

t: 07500 787 300

Harry Rands

e: hr@fletcherking.co.uk

t: 07826 857 097

FLETCHER KING, 61 CONDUIT STREET, LONDON W1S 2GB

FLETCHERKING.CO.UK

020 7493 8400