The property sector was hit hard in the Covid-19 pandemic, as suddenly the working, schooling and living habits of people across the globe were flipped upside down. Offices were closed, shops shut and hotels shuttered. As we start to emerge from lockdown, we spoke to two property fund managers about where the investment opportunities are:
On 2020
“2020 was not a good year for us,” says Jason Baggaley, manager of the SLI Property Income trust (SLI), which was down almost 30% last year and is still trading at a 24% discount to its net asset value. At the height of market volatility the trust cut its dividend, but Baggaley reflects he may have been too pessimistic in the extent of the cut and expects a “true up” to come. In the end, the trust collected 93% of the rent due from its tenants last year, though he adds that some rents were reduced through lease renegotiations or breaks and the picture could be slightly worse in the first quarter of this year.
Dirk Philippa, manager of the Fidelity Global Property fund, recalls: “I was due to go to a conference in the US in March last year and was told I couldn’t go because I’d been on holiday to Italy the week before. That’s when I realised this was going to be far more severe than I’d initially thought.” Philippa quickly made changes to his portfolio, selling big housing names, retail companies and office developers. “I increased the cash position in the portfolio to 9% - almost the maximum we can have – I’d never got close to that number before.” It wasn’t until the third quarter of the year that he started rebuilding his positions.
Offices
Offices are one of the most challenging areas to forecast at the moment, says Baggaley, with no way to know whether the home-working trend is here to stay. “I don’t subscribe to the belief that the office is dead. Having worked at home for a year, I find myself increasingly keen to get back to the office but maybe not five days a week,” he adds. Baggaley believes that centrally located offices will be resilient. Currently around a third of the portfolio is invested in office space, though this is likely to reduce.
In the future, having spaces that work for employees will be more important than ever, he says. “We try to create a sense of community in our buildings with yoga classes and pop-up stalls, food banks or social activities,” he adds. Sustainability is also a growing priority and installing solar panels on roofs not only brings additional income but helps the building reduce its carbon footprint.
Industrials
Logistics space has been one of the big winners of the Covid-19 pandemic, with a surge in online shopping creating a need for more warehouse and logistics centres. Warehouse operator Prologis (PLD) is the largest holding the Fidelity fund, accounting for 9% of the portfolio, but Philippa is conscious that strong performance means the sector generally is looking expensive. “It’s a part of the market where new supply can be created more rapidly and that makes me wary,” he adds.
The SLI trust has had a high exposure to industrial space for several years, though recent sales have brought it down to less than 50% of the portfolio. Last year, Baggaley bought a B&Q retail warehouse, which yields 7.5%. “It’s a great company that can continue to pay its rent and the asset will be great for urban logistics in the future,” he says.
Residential
Philippa is keen on residential property companies and likes several in the US, including one business that focuses on high-quality trailer home parks. The firm’s business model appeals as it owns the land rather than the homes, so collects rental income without having to worry about the depreciation of an asset. “There’s almost no new supply, so demand and rental collection rates are strong,” he adds. Elsewhere, he likes German real estate company Venovia, a residential apartment developer.
The fund’s global mandate means it can invest across the world, but Philippa says he is more focused on sectors than regions. “I was very overweight on the UK before Brexit and that was a painful experience,” he adds.
Retail
Baggaley has recently sold a Smyth’s Toys unit in North Shields because he anticipates a fall in rent. He adds: “It might be that beds replace retail, if we think about student accommodation – beds, hotels and the professionalisation of the rental market will all be areas of growth.”
Philippa invested in some retail landlords after 2020’s initial market tumult but insists “you need to pick your horses carefully”. He points to shopping mall operator Intu as one example of a former stock market darling and one of the strongest landlords in the UK, which didn’t adapt quickly enough and subsequently folded.
He adds: “Retail is structurally challenged, you have a client base that is truly in difficulty and can’t afford to pay the rent. Something has to give – the rents need to come down and if you have rents down and high gearing, that’s when the trouble starts.”
