Vacant shops and offices are ripe for a revamp: Where can you cash in by investing in Britain’s pandemic property revolution?
A land of opportunity or a no-go zone? Opinions are divided on the prospects for commercial property.
Some believe there is no solution to the problem of the scores of office blocks and shop units left vacant by Covid. Others view this real estate as ripe for transformation, drawing parallels with the fortunes made from the postwar regeneration of bomb sites.
As a result of poor town planning, the reconstruction after the war created some unlovely architecture.
But this time around, it will be all about the planet-friendly and elegant ‘repurposing’ of buildings to cater for ‘hybrid working’ (part-home, part-office) and other lifestyle shifts spurred by the pandemic.
If you believe such a reinvention is possible, your options include BMO Commercial Property. This investment trust stands at a 40 per cent discount to the value of its assets – which include St Christopher’s Place, the dining and shopping enclave that runs behind Oxford Street in London. While the trust would appear to be a bargain way to back UK recovery, investing now represents a sizeable bet on a mass return to some pre-lockdown habits – and that might not happen. Richard Kirby, the trust’s manager says: ‘As soon as we get out of the pandemic, people will want to go out and be entertained.’
BMO Commercial Property also holds online logistics centres, the most-sought after type of commercial real estate, and has stayed away from the High Street and shopping centres, which are among the least popular.
Yet the discount on this trust and others, such as Standard Life Property Income, reflects the crisis in the wider sector, which has led to the gating of some property funds. M&G Property Portfolio will remain closed until June, to the ire of its trapped investors. Commercial property’s woes – which have left landlords facing at least £4.2billion in rent arrears – stem from a number of causes, including ill-thought out expansion in the past.
Following this week’s news of the closure of more John Lewis stores, shop closures are expected to continue mounting because of the move to online and also because, unfortunately, more businesses tend to go bust in recovery than in recession.
Another issue is that employers are reducing space to enable home working – HSBC plans to cut by 40 per cent. The office glut is being exacerbated by existing tenants subletting space on the cheap. Savills calculates 6msqft of such ‘grey’ space is available in London. Small, smartly kitted-out, energy efficient workplaces are what companies want now.
Vying to provide such offices will be giants like British Land and Landsec. Hammerson, the lossmaking owner of malls like Brent Cross and the Birmingham Bullring will also be in the race. Chief executive Rita-Rose Gagné says all the group’s properties must ‘adapt’, which means less retail and more homes.
Jonathan De Mello of CWM Retail Consulting says it is wrong to assume physical stores have lost their allure. When lockdown eases, he believes there will be a clamour for old-school shopping for clothing and make-up, which can be bought online, but are more fun to see and sample in a shop.
For the sake of the future of our towns and cities, you may hope that the damaged sections of the commercial property sector can be repaired, but think the risks involved too great. Jason Hollands of BestInvest points out that, while BMO and the other trusts provide decent yields, they are a considerable gamble, given their high ‘gearing’ or borrowing ratios. In the good times, gearing can boost returns, but when gloom descends, it can magnify losses.
Investors in the M&G and other gated property funds may be so disenchanted that they will steer clear of commercial property ever after. But the sector is diversifying in response to the pandemic. The video-conferencing surge is one of the factors boosting demand for data centres, buildings that house large corporations’ computer systems. Triple Point will next week launch Digital 9 Infrastructure, an investment trust that proposes to build six UK data centres.
They may not beautify the outskirts of our towns and cities, yet they are part of the future.