Page 6 - DIY Investor Magazine | Issue 33

COMMERCIAL PROPERTY:
THE POST-PANDEMIC LANDSCAPE
Will Fulton and Kerri Hunter, Investment Managers,
UK Commercial Property REIT
• After a tough pandemic, commercial property recovered significantly in 2021
• Industrials led the way, while segments of the retail and office markets remained weak
• The outlook for individual sectors within commercial property is diverging with asset selection increasingly important
Commercial property was one of the success stories of 2021, as investors returned to the sector in search of inflation- adjusted income and diversification. However, performance was polarised between sectors and individual assets.
The need for discernment characterises the market in 2022 and beyond as the outlook for different sub-segments of commercial property, and more particularly the characteristics of specific assets, diverges.
Over the past 12 months, industrial and logistics property has continued to thrive, driven by strong rental growth and high demand, again producing the best performance with total returns of 36%; in contrast the poorest area of the market, shopping centres, achieved a total return of -5%.
In general, investors favoured higher quality assets, with the exception of the industrial sector where secondary assets performed well. Retail warehousing was also a stand-out in 2021.
This marks a break with its recent past and shows that the right retail assets still have a place in a commercial property portfolio. In general, those assets linked to discount retailers and with supermarkets performed best over the year.
‘INVESTORS RETURNED TO THE SECTOR IN SEARCH OF INFLATION-ADJUSTED INCOME AND DIVERSIFICATION’
UK Commercial Property REIT focused its attention on additions in areas it has seen growth including student accommodation, retail warehousing, and selective industrial with value-add opportunities.
‘TENANTS ARE INCREASINGLY DEMANDING WELLNESS FACILITIES AND A LOW CARBON FOOTPRINT’
WHAT LIES AHEAD?
More recently, in the early months of 2022, the market has started to become less polarised. We have seen industrial property deliver strong returns, but the gap with the rest of
the market is far smaller. The yield compression that has characterised the industrial market in recent years is slowing and from here, we believe returns will be driven by rental growth. Elsewhere, the picture is more complex. Polarisation of prospective returns within each sub-sector of the asset class is apparent – within offices, within retail, and so forth.
The office sector is interesting. Overall, the outlook for the sector is weak as it adjusts to an environment of agile working. It is still not clear the type of office life that will emerge, but it will certainly be different and businesses will need to change their office footprint. However, there is a notable gap between prime office spaces, with demand, and secondary, where demand is limited.
Sustainability credentials are important across all commercial property, but particularly so in the office market, where tenants are increasingly demanding wellness facilities and a low carbon footprint, alongside the usual attributes of a strong location, access to local amenities and proximity to public transport. Offices with these characteristics are in short supply with good rental prospects.
DIY Investor Magazine · Apr 2022 6