Many investment markets are continuing their recovery from the effects of the Covid-19 global pandemic. Global equities are at all-time highs and credit spreads at almost historic lows; considering this, what is the outlook for property?
The UK property market also continues to recover despite some sectors still suffering issues caused by unpaid rents, particularly in the retail and leisure sectors which have been closed due to lockdown restrictions. However, as the restrictions continue to lift, we should see rent beginning to be paid as normal. Some property funds are using the weaker investor sentiment to increase exposure with one large fund buying a central London hotel for £70m from administrators in April 2021.
As there is a wide range of performance amongst the UK property sectors, active management with an experienced team is important. The industrial sector continues to exhibit strong performance as the need for warehousing increases, driven by the upsurge in e-commerce, which has necessitated a growing requirement for the storage of goods. This happens at the expense of retail, which is in a structural decline as less people visit shops to purchase goods. Managers who can capitalize on these themes will be successful for the long term.
UK property currently provides a very attractive yield relative to other asset classes, which will reduce volatility to help provide consistent returns. UK commercial property is yielding c.5% versus the UK Base Rate of 0.10% and 10-year Gilts (0.74%).
A supportive backdrop for the UK property market is created by international investors looking to take advantage of the current weakness of the pound; UK property prices are relatively affordable compared to other global property markets. As an example of this confidence, the largest single investment transaction in Q3 2020 was from a Hong Kong based investor that bought Morgan Stanley’s headquarters in Canary Wharf for c.£380m.
UK property funds which are defensively positioned, with high relative income yields and significant levels of portfolio diversification, are best positioned to deliver strong performance over the long term.
For advice based on specific scheme circumstances, trustees should contact their investment consultant.