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Investing in property shares – how the pandemic’s divided the sector

From shopping centres to office space, we look at what the pandemic means for the future of companies operating in the UK property market.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Property isn’t a fast-moving industry. That’s left it particularly exposed to the huge and very rapid changes to society brought by the pandemic.

Lots of tenants have struggled to pay the rent or handed back the keys. New tenants looking to take on more space are few and far between, and repurposing buildings is expensive and time consuming. Remember big mortgages must be repaid whether there’s a tenant paying the rent or not. It all makes for a pretty toxic combination for landlords.

However, change can create winners as well as losers. We’ve had a look at the major property sectors, and the companies that operate in them, to help sort one from the other.

This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for advice. All investments and any income they produce can fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Retail – gone for good?

Traditional retailing has been a high-profile casualty of the pandemic. Shopping centre giant Intu, which owned the Trafford Centre in Manchester, collapsed into administration last summer while rival Hammerson reported losses of £1.7bn in 2020.

The causes are simple enough. Having been forced to close for months on end, retail and leisure tenants either couldn’t or wouldn’t pay up. At Hammerson the group managed to collect just 76% of the rent it was owed in 2020. Revenue fell even further, down to 74.3% of 2019 levels thanks to an increase in empty stores. £100m of interest to pay on debt meant the group had to turn to shareholders for help – raising £556m from selling new shares.

However, the real concern across the industry isn’t the damage already done, but whether behaviour will ever return to normal. Online shopping has been growing for years, but boomed over the pandemic and now accounts for around 25% of all sales. As recently as August, Hammerson said that footfall was around 75% of pre-pandemic levels.

Hammerson share price and charts

Internet sales as a percentage of total retail sales

Scroll across to see the full chart.

Source: ONS, released 20 August 2021, covers November 2006 to July 2021.

Less physical shopping ultimately means fewer physical shops, and that’s bad news if you’re a retail landlord. Oversupply in the industry would likely mean writedowns in property value and lower rents, which hurts profits.

It’s not all doom and gloom though.

Retailers like Marks & Spencer have reported strong sales numbers from out of town retail parks – where customers can take advantage of click and collect services and social distancing is easier. That might provide a bit of relief for the sector.

Marks & Spencer share price, charts and research

British Land, which owns a mix of office and retail properties, has a little over 50% of its retail portfolio made up of retail parks. Back in May it said footfall in its out of town assets was actually ahead of pre-pandemic levels, and it plans to invest more in the area going forward.

British Land share price, charts and research

Offices – climate change matters in the work environment

So far office landlords have weathered the pandemic rather well. Offices have stood empty, but rents have still been paid. Central London landlord Derwent London collected 95% of its office rents in the three months to the end of June, versus just 59% in retail and leisure.

Derwent London share price and charts

Long term though remote working is in some ways as big a threat to offices as online shopping is to retail. Even if companies do need an office of some sort, the last 12 months have shown that many companies probably don’t need all their staff in five days a week. It’s hard to see finance teams keeping prestige offices half empty most of the week, and downsizing looks inevitable.

However, the office market is anything but standardised, with large quantities of comparatively low-quality office space. A recent study from property group Colliers found that 10% of London offices don’t meet new environmental standards due to be introduced in 2023. Another two thirds is poorly rated and will need upgrading in the next decade or so.

Colliers share price and charts

We think this bodes well for more modern properties, especially as tenants are increasingly concerned about reducing their carbon footprint. British Land has committed to operating a “net zero carbon portfolio” by 2030 and putting energy efficiency at the forefront of future development projects.

As lower quality offices are squeezed out of the market, either through regulatory action or tenant choice we expect rents and valuation at purpose built modern assets to remain buoyant – even if there is some downsizing from established customers.

Logistics – a logical necessity

From a property perspective logistics has been one of the winners from the pandemic.

Traditional retail requires businesses to deliver stock from warehouses to maybe a couple of hundred store locations around the country. Ecommerce means being able to deliver to any address in the country. More deliveries to more locations mean larger, more complex warehouses and more of the smaller “last mile” warehouses, which are essentially what’s used for the final leg of a good’s journey. Demand for these assets has boomed.

You can see the benefits in the results of logistics specialists. LondonMetric, which specialises in smaller “Urban Logistics” last mile sites saw the value of these sites rise 15.5% in year to March 2021, compared to a 3.2% fall across the wider property market. Rival Tritax Big Box REIT, which specialises in larger “big box” assets – large warehouses of 500,000 sq ft and more – reported a record year for demand, almost more than the previous two years combined.

LondonMetric share price and charts

Tritax Big Box share price and charts

However, the market doesn’t overlook these kinds of opportunities.

Real Estate Investment Trust - Price/Book Ratio

Source: Refinitiv, 24 August 2021.

The graph above gives the price-to-book (P/B) ratio for 6 major UK Real Estate Investment Trusts (REITs). You calculate a P/B ratio by taking the market value of all the company’s shares and dividing by the value of the company’s assets minus any liabilities. A P/B ratio of 1 therefore means the company’s shares are trading roughly in line with the theoretical “book” value of its assets. Remember ratios shouldn’t be looked in isolation.

You’ll notice that retail specialists are trading at a fraction of their theoretical book value. But logistics specialists like Tritax and LondonMetric are trading for more than their assets are theoretically worth. Investors need to ask themselves whether that’s justified.

Prospective dividend yields of 2.9% and 3.5 % respectively could mean investors are paid to wait and see what the logistics giants could deliver. Remember all dividends are variable and not guaranteed. Yields are not a reliable indicator of future income.

However, we worry that logistics may have reached a short-term high, as unlocking takes some of the heat out of the e-commerce boom. Whether recent growth in property values and rental income can be sustained is unclear, and that would be painful given the higher than usual valuations.

For more information on how to analyse individual property companies read our guide to REITs

Unless otherwise stated estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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