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Investing in commercial property: a tale of three markets

Britain’s commercial property sector has traditionally been divided into three subsectors: industrial, offices and retail. In the 1980s and 1990s, retail outperformed while industrial properties struggled as consumer spending rose inexorably but the country deindustrialised. In the last ten years retail has lagged as household spending migrated online; industrial property, however, has outperformed thanks to the growth in logistics warehouses, notably to service online shoppers. But in recent years some of the best growth has come from three smaller subsectors: student housing, healthcare and self-storage – or beds, meds and sheds. Investors can gain access to each of these subsectors through real-estate investment trusts. Are they still worth a look?

The university boom

Student numbers reached 2.3 million in 2018; 75% are undergraduates and 80% are British. Despite the introduction of full tuition fees in 2012, more than half of school leavers go on to higher education. The annual number of applicants through the Universities and Colleges Admissions Service (UCAS) has doubled to 533,0000 in 25 years. Students used to live in college-owned halls of residence or in the private rental market. But demand outstripped both the willingness of the former to provide the necessary capital and the capacity of the latter.

Unite Group (LSE: UTG) was founded in 1991, initially to provide purpose-built student accommodation in the Bristol area. It now provides 75,000 beds across the country. Unite forms partnerships with universities to ensure high occupation: 92% of beds are reserved for 2019/2020 and 60% are guaranteed by universities. Occupancy of 98%-99% has consistently been achieved and rental growth is in the range of 3%-4% per annum. At mid-year the group’s assets stood at £3.2bn, of which £1bn was financed by borrowings, although the £1.4bn recent acquisition of Liberty Living will have increased gearing to around 35%.

The shares, at 1,240p, trade at a 47% premium to net asset value (NAV), are valued at over 30 times earnings and yield just 2.6% but Unite says that the acquisition is “materially accretive to earnings”, while it is “confident of 3%-3.5% medium-term rental growth”. But even if the 12% growth in interim earnings and 8% growth in the dividend continues, it will take several years for the shares to look good value, despite the low-risk business model.

A turnaround story

Empiric Student Property (LSE: ESP) with 8,882 beds and £1bn of assets, seems much better value at 98p. It is on a 10% discount to NAV and yields 5%, but it is recovering from operational problems in 2017 that prompted a dividend cut. It focuses on smaller, higher-quality and more expensive buildings to appeal to graduates (46% of tenants) and overseas students (67%). GCP Student Living (LSE: DIGS), with £960m of assets, is of a similar size, but has less debt and an unblemished record. It trades on a 14% premium to NAV and yields 3.2%. It has 4,116 beds in 11 locations, but just 23% of its tenants are from the UK. As with Empiric, this may be an advantage as growth in international student numbers looks assured.

The rise of the health centre

The merger of Primary Health Properties (LSE: PHP) with MedicX leaves just two companies specialising in health centres: PHP, with £2.3bn of assets and Assura (LSE: AGR), with £2bn. Both trade on large premiums to NAV (38% and 50% respectively). But the attraction is dividend yields of 3.7% and 3.5% that are not only very safe, but also all but guaranteed to be at least inflation-indexed.

Both groups own purpose-built health centres, at least 90% of whose income comes directly or indirectly from the NHS on long-term leases, with the rest coming from pharmacies. Following the acquisition of MedicX, PHP now owns 488 of these, which are 99.5% occupied, while Assura has 560.

These health centres have replaced many of the old, small GP surgeries, but house many more doctors together with modern equipment, clinics, diagnostic testing, pharmacies and even day-surgery centres. Rental agreements provide for modest annual increases, but there is the potential for more if a property is modified or extended. Expansion comes from buying recently built premises or through funding a developer and then buying on completion, thereby avoiding risks connected with construction.

With only 20% of the PHP portfolio having a lease expiry of less than ten years, there is little opportunity or wish to trade the assets; the value of the shares lies in the rental stream. This makes them comparable to infrastructure funds, except that ownership of the assets is permanent. Strong performance in 2019 means that the shares of both are no longer great value, but they represent sound investments for those seeking secure, growing income.

The “meds” theme also covers two smaller companies that own residential care homes, Impact Healthcare (LSE: IHR) and Target Healthcare (LSE: THRL). Target, with £600m of property assets and £100m of net debt, operates 69 purpose-built care homes. Impact, with £311m of property assets and some £10m of net cash, owns 84 care homes and two healthcare facilities leased to the NHS. In both cases, the care homes are leased to high-quality operators for the long term, with built-in rental increases. Both shares seem attractive, with Target trading on a 7% premium to NAV and yielding 5.8%, while Impact trades on a 2% premium and yields 5.7%.

Note, however, that the number of care beds in the UK has fallen some 20% since its peak of around 550,000 in 1997. The NHS and local authorities have not been prepared to increase payments to operators by enough to cover escalating costs. In 2011 Southern Cross got into trouble amid an 8% drop in occupancy, the result of fewer referrals due to public-spending cuts. It could not pay its escalating rent bill and became insolvent. Well-run care homes are the most cost-effective way of caring for the elderly, but governments have repeatedly pursued the false economy of squeezing the private operators, who account for nearly all capacity. If this keeps happening, Target and Impact could find their rental income under pressure from struggling operators.

Businesses need more storage space

The self-storage market conjures up images of warehouses crammed with personal possessions. That, however, probably only accounts for a small part of the UK’s 20 million square feet of lettable area, with rates varying from £16 per square foot (sq ft)in Scotland to £28 in London. Personal storage is an important part of the market, but the business market is key. For small businesses, storing goods, records and stock at a self-storage unit or lock-up garage is likely to prove much cheaper than doing so at an office or in a shop, particularly with the increasing number of online entrepreneurs operating from home.

Hence the success of the two listed specialists, Safestore (LSE: SAFE) and Big Yellow (LSE: BYG), trading at premiums of 52% and 75% to NAV and yielding 2.2% and 2.8% respectively. Safestore, with 149 stores (including 22 in the Paris region) has 6.5 million sq ft of lettable area valued at £1.4bn and Big Yellow, with 75 stores, has 4.6 million sq ft valued at £1.5bn.

Big Yellow’s recent interim results revealed revenue and profit growth of 3.4% and 6% respectively, thanks to a small increase in like-for-like occupancy and a 1.9% increase in rent per sq ft. Lettable area increased only 0.7%, although there are 13 development sites, of which six have planning permission. Big Yellow also owns 20% of Armadillo, with 25 stores, which it presumably hopes to buy the rest of. That would give it 6.6 million sq ft in all.

Safestore’s recent final results showed a 5.6% increase in revenue and a rise in earnings per share of 6.3%, thanks to increases of 3.5% in average occupancy and a 1% in average rates. It plans four new stores in 2019/2020, but insists that its “top priority remains the growth opportunity of the 1.5 million sq ft of currently unlet space”. Big Yellow’s occupancy of 83.4% is higher, despite its larger stores, giving less unlet potential and its net rent per sq ft of £27.73 is 6% higher than Safestore’s, despite the latter’s focus on London and the southeast (70 stores). Both shares trade on 27 to 28 times underlying earnings, so they look expensive despite the solid record and prospects.

ASR strategist Zahra Ward-Murphy acknowledges that “the beds, meds and sheds theme is not new and these sectors have been outperforming for some time. Nonetheless, we like these sectors because they are underpinned by secular demand drivers and therefore should prove relatively resilient to any further slowdown in growth”. Business risks look low and dividend yields are reasonable in relation to low interest rates and bond yields, while dividends should climb steadily.

However, with the exception of the recovery story of Empiric and the historically risky care-home owners, valuations are high and vulnerable to market setbacks, so investors should wait for the next general sell-off before eyeing them up.

By Max King

Source: Money Week

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Sharp fall in Scottish commercial property market

An analysis of commercial property sales during the first quarter of 2019 from the Scottish Property Federation (SPF) claims that total the value of sales in Scotland fell by 21 per cent compared to the same period in 2018. The drop in value was largely driven by fewer high-value transactions for this period, with the number of £5m+ sales down by nearly one-third compared to Q1 2018.

The SPF analysis shows a 21 per cent (£203m) year-on-year decrease in sales by value in Q1 2019, with the value of commercial property sales in the quarter totalling £763m. The SPF also reported £3.03bn in property sales across Scotland for the last four quarters, the lowest rolling annual total since Q2 2014.

Property data experts at CoStar reported a similar decrease in investment in Scotland in Q1 2019. Investment volumes fell compared to Q4 2018 and Q1 2018 by 41 per cent and 54 per cent, respectively. CoStar points to investment into alternative assets as the key driver of activity in Q1 2019, with below average investment into Scotland’s industrial and office sectors.

Edinburgh bucks the trend

Edinburgh showed a break from the national trend in Q1 2019, with higher values than the same quarter in 2018. The Capital recorded a total value of £264m in commercial property sales, accounting for 35 per cent of the total value of commercial property sales in Scotland.

Aberdeen also saw commercial property sales recover against the previous quarter, with an increase from £14m to £41m. However, year-on-year, the total value of Aberdeen’s sales fell sharply by £125m.

Glasgow experienced a decrease in the total value of sales by £26m (15 per cent) from the previous quarter but rose by £49m on Q1 2018. Nineteen per cent of the total value of Scotland’s commercial property sales in Q1 2019 occurred in Glasgow, totalling £171m.

David Melhuish, Director of the SPF, commented: “The sales report for Q1 2019 shows a clear fall in total value of commercial property sales compared to the previous year. This aligns with investment data suggesting a subdued start to 2019 for the Scottish commercial property sector.

“However, the sales data does underline the current strength of Edinburgh’s commercial property market, with the Capital accounting for 35 per cent of the Scottish market by value. The investment data also highlights the rise in investor appetite for alternative property asset classes, such as hotels and build-to-rent. For investors, Edinburgh remains a hotspot, while more broadly, low growth and lack of certainty in the economy is weighing down on activity.”

By Neil Franklin

Source: Workplace Insight

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North’s commercial property market reports healthy start to 2019 and further positivity ahead

THE north’s commercial property sector enjoyed a positive start to 2019, according to the latest market research.

The new report from Lambert Smith Hampton, which covers the first three months of the year, shows the total investment volume of £42.5 million was almost three times higher than the same period a year ago (£17m). However, that figure is 47 per cent below the five-year quarterly average.

The latest Investment Transactions Northern Ireland Bulletin is a continuation of consistent investment witnessed over the last year, but the total of five transactions last quarter is the lowest in five years.

The deals struck in the first three months of year were largely dominated by the office sector, with the largest transaction at the start of 2019 a local government department’s £16m purchase of James House at the Gasworks in Belfast.

Other notable transactions included the £9.6m sale of Donegall House to a private investor group, as well as retail operator Henderson Group’s £7.6m acquisition of a portfolio of petrol filling stations, which they already occupied as tenant

While there were a flurry of large retail transactions at the end of the year, retail was notably absent at the beginning of 2019.

Looking ahead a significant pickup is forecast in the second quarter of the year, with 21 deals either completed or agreed, totalling approximately £75m.

Lambert Smith Hampton director of capital markets, Martin McCloy said the local market continues to be impeded by ongoing political uncertainty.

“It is generally accepted that the six-month extension to the EU/UK withdrawal date and preventing the UK crashing out of the EU in a ‘no-deal’ scenario was the best outcome at the end of the March for the UK and Northern Ireland. However, there is no doubt that the continuation of this period of uncertainty will continue to frustrate the investment market,” he said.

Since the EU referendum in 2016 there has been a steady decline in investment activity in Northern Ireland, with the quarterly average

of the ten quarters pre-referendum (£101m) more than a third less more than the average during the same period post-referendum (£63m)

Coupled with the lack of a Northern Ireland Executive it has led to a ‘wait-and-see’ attitude, which has created a lack of supply to the market. That being said good quality assets remain in demand, according to Mr McCloy.

“Properties with solid fundamentals will remain attractive to investors. A recent report by MSCI reported that Belfast was among the top performing UK office investment markets in 2018. Coupled with the strong office occupier market, we expect that in 2019 office investment will become the predominant asset class in Northern Ireland, over taking retail,” he added.

By Gareth McKeown

Source: Irish News

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Industrial demand to the fore in commercial property sector

Demand for industrial space is dominating the East of England commercial property sector as interest in retail continues to falter, according to new research.

The Q1 2019 RICS UK Commercial Property Market Survey also reported anecdotal evidence suggesting a lack of movement on Brexit continues to deter investors and occupiers across the board.

Across the sector, demand for the East of England’s commercial property dropped in the first quarter of 2019, being mainly driven by the lack of interest in retail units.

Some 37 per cent more respondents reported a fall in the first quarter of 2019. The rise in online shopping continued to sustain the industrial sector where respondents continued to experience a steady rise in tenant demand.

Demand for the East of the England’s industrial units continued to outpace supply, the report also found. This quarter, respondents reported a fall in the number of available units for sale, resulting in more respondents expecting rents to rise in the coming three months.

The latest survey data also supports recent reports on the number of empty shops on the region’s high streets, as the number of vacant retail units have been increasing over the past 15 months.

Alan Matthews, of Barker Storey Matthews in Huntington, said: “There is no doubt that the uncertainty of Brexit is being felt across the board. I believe the outlook for our region in the medium to longer term is positive but expect to see considerable volatility over the next 12 months and possibly longer.”

RICS economist Tarrant Parsons added: “Trends across the UK commercial property market in the early part of 2019 have continued in a similar vein to those reported last year.

“The industrial sector remains a clear area of strength while the retail sector continues to be challenged by the growth in e-commerce.

“Brexit uncertainty is again cited to be a negative influence on market activity, causing some occupiers and investors to hesitate as they await further clarity on the future direction of policy.”

Source: Insider Media

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Commercial property: High street challenges need addressed

The currently volatile environment for UK retailers presents a significant challenge to the commercial property sector. Along with the estimated 85,000 jobs lost in UK retailing in 2018 is the worrying rise in empty commercial units.

Figures published in the Scottish Retail Consortium-Springboard Footfall and Vacancies Monitor show hat one in eight high street shop premises lay vacant last month, with a 12 per cent town centre vacancy rate in Scotland, up the 11.1 per cent recorded last October.

Steps are being taken across the nation to repurpose some of these vacant premises for residential, hotel, leisure or community use.

However, UK retailers must also continue to repurpose their businesses to ensure they are relevant to the changing nature of consumer demands.

Many of those which managed to avoid insolvency last year are now embarking on store closure plans and rationalising their portfolios. The trend of traditional retailers extending their online offering also continues, with some smaller stores diversifying by installing convenient customer options such as Amazon lockers and becoming click-and-collect points for larger retailers.

Technological advances, including the use of mobile payment, scan and payment checkout apps, are also making the sector more efficient, while further progress in areas such as VR and AI offers an additional strand of support.

In spite of these positive developments, there is no doubt that many of the larger retailers will continue to struggle with the size and cost of their property portfolios. Debenhams is continuing discussions with its lenders and is not ruling out a company voluntary arrangement, while the new management at Marks and Spencer is promising dramatic changes in range, style and customer focus.

Meanwhile, other big high street names seek to negotiate reduced rents with their landlords to keep themselves trading. The changing nature of the marketplace requires retailers to make bold decisions to entice consumers and leverage value from their physical premises.

Apple and Selfridges are both successfully doing this by making shopping at their outlets an experience. Selfridges credits its successful Christmas trading period to the staging of festive events which drove people into its stores, and Apple delivers added value for customers in its premises by holding free events.

The progression of some online retailers moving to a bricks and mortar model could also make a positive impact on the commercial property sector. Amazon Go is reportedly looking at expanding its app-based convenience store brand into London with the potential of Amazon Books stores opening in the UK.

Physical premises supported by a strong online presence point to the future direction of travel in retailing. While we expect more casualties in the year ahead, the changes that are currently being implemented provides some comfort to commercial property landlords as retailing continues its challenging evolution.

The UK retail market is one of the most dynamic in the world and is the biggest employer in Britain; it is also one of the most adaptive to change. But landlords and tenants must act quickly to stem the tide of store closures and declining footfalls.

Source: Scotsman

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Struggling retail sector dragging down north’s commercial property sector

A WEAK retail sector is dragging down an otherwise strong commercial property market in the north, according to a new report.

The latest RICS and Ulster Bank Commercial Market Survey, covering the last three months of 2018, shows

a decline in demand for retail space, largely driven by changing shopping habits.

The figures further reveal that enquiries for retail property have fallen for the fourth consecutive quarter.

The outlook for the industry is no brighter, with an expectation retail rents will continue to fall over the next three months.

The retail performance is in direct contrast to the overall picture, with the north one of only a small number of UK regions to report an increase in occupier demand (10 per cent of respondents)

Investment enquiries are also reported to have picked up for the first time in nine months.

The encouraging figures were boosted by the industrial and office sectors,which both reported an increase in demand, the former from a net balance of 26 per cent of respondents and the latter, 48 per cent.

The rental outlook is also positive for the next three months, particularly within the office sector, while

enquiries regarding office and industrial assets are on the increase.

RICS Northern Ireland chairman, Brian Henning said the retail figures mar an otherwise positive market performance.

“Changes in the preferences and behaviours of consumers are resulting in a continually challenging landscape for the retail sector,” Mr Henning said.

“On the other hand, sentiment amongst surveyors remains relatively positive in the industrial and office sectors, which is encouraging in the face of uncertainty. Retail aside, expectations for the market are also relatively upbeat considering the landscape.”

Gary Barr, relationship director for commercial real estate at Ulster Bank added:

“The downturn in high street retail has been most keenly felt in our secondary centres. Investor demand for office and industrial has remained robust and prime assets in Belfast city centre are most in demand.”

Source: Irish News

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‘Dark cloud above our heads in form of Brexit’ after spectacular year in commercial property

SCOTLAND’S commercial property sector rode a financial services wave after Barclays’ Glasgow acquisition but while the “mood music is very positive, ultimately there is a dark cloud above our heads in the form of Brexit”.

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Decline in new UK commercial property construction work within private sector

The results of the EU referendum have been detrimental to the commercial property sector with the number of constructions continually decreasing, according to an analysis of the figures by Savoy Stewart.

With figures from the Office of National Statistics (ONS) showing a monthly decline in the number of new UK commercial construction work undertaken by the private sector since December 2017, the property firm analysed the number of commercial properties available to let in 20 of the biggest cities in the UK.

As expected, the city with the highest number of commercial properties to let was England’s capital city London, which had 6,137 properties in November 2018 available for businesses to rent.  However, figures from estate advisory organisation Colliers claims that 90 percent of London office availability is constituted by second-hand product, while new/refurbished availability is down by over a third in the past year.

Scotland’s capital city Edinburgh had the second lowest number of commercial properties on the market to let (133). And although Edinburgh’s figures seem to be less intriguing than anticipated, it seems Scottish commercial real estate has experienced a bounce back, with a total return of 1.7 percent in the third quarter of 2018; a 1.4 percent rebound in the second quarter.

The figures, which were extracted from property website Zoopla for the month of November 2018 also showed that The cities with the highest number of commercial properties to let in November 2018 on Zoopla were: London (6,137), Derby (822), Birmingham (724), Manchester (501) and Leeds (481).

The cities with the lowest number of commercial properties to let in November 2018 were: Preston (153), Coventry (145), Belfast (145), Edinburgh (133) and Newport (128).

Source: Work & Place

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How is the UK commercial property sector performing?

The UK commercial property market is rapidly changing and facing highly uncertain times in the face of Brexit. We have a look at how the industry is evolving and what commercial property stocks to watch.

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Get ready for the commercial property data revolution

In these uncertain times, modern commercial real estate landlords and operators have turned to technology and data to weather the storm and gain a competitive advantage. Those that do so are arming their companies with an ability to quickly pivot operating models, reallocate investment to counter risk and capitalise on opportunity.

The right software lets you future-proof your business, enables you to understand performance in real-time and most importantly helps you predict what’s next – the biggest hotspots and opportunities, which team members are doing well, and who needs some support.

You don’t have to look far to see the transformative power of data and examples of how it is successfully being applied to drive digital transformation. Take the financial sector, where unleashing the power of data has not only streamlined workflows but also enabled firms to grow their businesses through powerful AI applications that personalise their services.

According to a 2017 Forrester report, there is an increasing gap between financial firms that embrace technology to fuel growth and business transformation and institutions that continue to do business in traditional ways.

The evolution of the stock market also highlights the value that technology and actionable data unlocks. Look at the New York Stock Exchange. Thirty years ago it was characterised by highly inefficient and manual processes and opaque information. Today? Technology has transformed the way the market operates and traders are able to leverage real-time data and algorithmic trading to execute deals in nanoseconds.

The commercial property sector is making great strides in using new software offerings such as leasing and asset management platforms to capture and analyse data. Landlords and brokers are using the resulting insights to make better decisions that move the needle. We’re fast approaching the next major frontier – market benchmarks.

Using real-time market data to make better decisions has been the standard in our own backyard for other property types such as multi-family and hospitality for some time. RealPage Yieldstar® helps PRS owners leverage market data to determine pricing in real-time and for hospitality the STR Global Report helps landlords benchmark a hotel’s occupancy or revenue that day.

Unlike PRS real estate or the hotel space, when it comes to office, industrial or retail properties, market leasing data on pricing, tenant demand or operating efficiency within buildings is neither transparent to the market nor recent.

We are working hard to develop the ultimate market benchmark. In June, we announced plans to launch VTS MarketView™ – the industry’s first real-time benchmarking and market analytics. For the first time, VTS customers will be able to compare their own property-level performance against market-wide data on our platform.

Aggregated and anonymised, this data and insight will be embedded in users’ daily leasing and asset management workflows and presented in context to drive better decisions, informed by key market-wide metrics such as net effective rents, concessions, leasing spreads and velocity, level of tour requests and deal conversion rates.

For the commercial property industry, the possibilities for how technology and data can be applied are endless. For example, AI could be applied to real-time market benchmarks to provide landlords with property-specific predictions and recommendations for maximising asset value.

These are exciting times, but not without risk. Now, more than ever, it’s time to embrace the data revolution or risk being left behind.

Source: Property Week