British commercial property outside London has been drifting in the doldrums since 2007 but, according to Guy Glover of F&C’s UK Property fund, things are picking up at last
What do Carpetright in Tunbridge Wells, Homebase in East Grinstead, a job centre in Reading and The Standing Order pub in Edinburgh have in common? They are all in buildings owned by Foreign & Colonial’s UK Property fund.
Manager Guy Glover reckons that if you want to find property bargains in Britain, you have to look outside of London’s overheated market. The fund was launched nearly three years ago, and while not achieving much on the capital growth front, has been paying a yield of around 4 per cent. This year, changes to corporation tax as it becomes a PAIF – a property authorised investment fund – will see the yield rise to 5 per cent, and Glover is hopeful that the long dark night for British commercial property outside the capital that began in 2007 will soon be over.
He’s not alone in thinking that commercial property will be one of the better performing asset classes in 2013. Investec Wealth & Investment said earlier this month it is shifting £500m of its private clients’ money into commercial property, doubling its weighting to the asset class – and also thinks outside London is best. Chris Hills, its chief investment officer, says: “Capital values outside London have hardly recovered from the lows of 2009 and yields are much higher than in London. We believe that some of the weight of money going into London in the past few years will extend into the UK’s regions as confidence in our economic recovery increases.”
This is music to Glover’s ears. He thinks that while the centres of Britain’s second-tier cities and towns have had at best “muted occupier demand” the corollary is that virtually no new Grade A space has been built in recent years, so when the upturn does come, these markets may see a sharper turnaround than expected.
It’s notable how much retail space Glover holds, given the almost universally downbeat view of the sector, bashed by the internet on the one hand and miserable wages growth on the other.
In total, 42 per cent of the fund is in retail and only 25 per cent in offices. The day after I interviewed Glover, the ONS issued figures on retail sales that were surprisingly strong, rising 2.8 per cent in May after a setback in April, although quite how long that can be sustained when real earnings growth is running at 1 per cent or less is open to question. Glover says it’s all about location, location, location. “In the top ten locations in the UK, things are actually looking pretty rosy in retail. What we are seeing is the continuing evolution of the high street: Retailers are moving from wanting to be in the ‘top 500’ towns to being in the ‘top 100’ towns where people are choosing not just to shop but to eat out or go to the cinema.”
He agrees that some stores are becoming little more than showrooms as people use the internet to make purchases, but that doesn’t mean they will all collapse. He cites John Lewis, where people may visit the store then purchase the goods from the company’s website later. But it does make grim reading for the fourth or fifth-tier towns, where retail centres may never recover from this downturn.
But more important than the top-down macro picture is spending the time finding the right property with the right tenant. “We have a 100 per cent let portfolio which has had no voids,” says Glover, making the point that voids wreck your performance. “If you lose a tenant you can lose five years of income. You can spend two years having to refurbish a building while at the same time having to pay rates and service charges.” It’s one reason why F&C doesn’t just act as a property fund manager, it also has a unit that manages the properties on a day to day basis. “Our guys are there to ensure that the tenants are happy and that we are close to everything that’s going on with the building.” Interestingly, London is not only much more expensive, but tends to offer shorter leases to tenants than can be obtained in the provinces.
But Carpetright? Isn’t that the sort of operation that could go bust any day? After all, the furniture sector has been ghastly in recent years, with Dwell the latest to face questions about its survival. It’s not exactly blue chip, is it?
Glover disagrees, and cites the Carpetright building in Tunbridge Wells as a good example of individual stock picking, so to speak. “It’s one of the better units in town, and importantly it’s right across the road from John Lewis. It’s actually very stable, and if anything did go wrong we would be able to re-let it very easily.”
But memories of the property crash of 2007-08, when funds went into lock-down, are still fresh. At Hargreaves Lansdown there are no property funds in the Wealth 150, and quite deliberately so, says head of investments Mark Dampier. He thinks that in property, everybody comes in or goes out at the wrong time, and open-ended vehicles just don’t make sense for this asset class.
That said, it’s not surprising that the drum is beating for commercial property ever more loudly. “Over the last few months we’ve seen an improvement in sentiment in commercial property,” says Glover. “This instinctively feels like a sensible place to be compared to gilts and equities.”
Patrick Collinson is the Guardian’s personal finance editor