Columbia Threadneedle Investments: Boots on the ground belie the media's daily drip of doom and gloom

Richard Kirby, Fund Manager, Balanced Commercial Property Trust

Despite the daily diet of alarmist headlines, since the fourth quarter of last year we have witnessed an improving picture in certain sectors of the commercial property market, most notably industrials, logistics and retail warehousing. A pick-up in investment activity has seen prices firm.

While there is no doubt that the UK faces many challenges, on a daily basis ordinary people are getting on with their lives. Supply in many sectors including industrials, logistics and retail warehousing, remains constrained as speculative building projects press pause amid rising borrowing costs and high inflation.

The shortage of good quality real estate manifests in several ways. At our property in Speake, in Liverpool, we have experienced multiple tenants chasing for the same logistics unit, bidding against each other. And in our portfolio of retail warehouses, for the first time in many years we can report that all our units are let with zero voids.

A step-change in savvy consumers

In the consumer space, visitor levels at our retail parks in Solihull, in the West Midlands, and Newbury, in Berkshire, are now higher than pre-Covid pandemic levels. A rising cost-of-living is influencing consumer behaviour but that doesn’t preclude a halt in essential shopping.

Our investment in these retail parks aligns to core retailing; grocery, discount retailers and convenience. Here we have seen first-hand how discount retailers such as Lidl, Aldi and Home Bargains are driving footfall. In the more cost-conscious environment prevailing, they are trading very well. An interesting observation we have seen emerging is the consumer crossover taking place among retailers.

In Newbury, where Lidl has been a tenant since 2020, we have seen it performing very well in a location alongside the more upscale M&S. Literally, you can see shoppers walking between purchases from one store to the other. Anecdotally we hear of consumers purchasing essentials from discount retailers and then ‘treats’ from its more costly peer. This confirms to us that the future of retail parks is tied to ensuring a mix of retailers.

Recovery in the heart of London’s West End

At St Christopher’s Place, our estate of 172 lettable units located in the heart of central London, we are seeing activity that is at odds with the pessimistic headlines in mainstream media. Footfall is up substantially. We have noticed a significant pick-up in the number of people returning to work in offices and far more tourists in town than is perhaps widely assumed. Restaurants are really busy again and from a letting perspective we are seeing renewed interest. Residential occupancy has recovered from the nadir of Covid and in addition to all of our residential units now being fully let, they are achieving rents in excess of pre pandemic levels.

A discernible change from the pre pandemic days is the timing of peak footfall. It used to be the case that this was weekdays – when office workers were in. Now, the busiest period occurs at weekends with people coming into the West End to enjoy a social or leisure experience. Better/faster transport in the form of the now hugely popular Elizabeth Line (East-west rail link) has been among the transformative elements attracting more individuals to this part of central London.

Much-needed regeneration gets underway in Oxford Street

It would be amiss not to acknowledge disappointment with Oxford Street. Once a premier retail shopping location, in recent years it has, in common with high streets up and down the nation, succumbed to competition from on-line shopping with department stores and fashion outlets falling idle. A double pronged response to this situation is now underway.

The most immediate is a fall in rents. These have re-based from around £1,000 per square foot of space to around £650. In addition, since 1 April new business rates valuation has seen business rates drop by on average 40% along the Street. This translates to occupancy costs being far more competitive than they were, resulting in renewed interest from retailers.

In a second development, many obsolete buildings are being repurposed. The multi-story flagship store of the now defunct Debenhams has been razed to the ground to make way for a new construction. The retailer John Lewis is retaining its premises but reassigning some space for office rental. And, a very sizeable corner plot at the Marble Arch end of Oxford Street, owned by M&S, is pending a decision on demolition and rebuild to a different specification. That decision, to be made by the department of the environment, is due mid-May.

All aboard a more upbeat destination.

I’ll end by saying that as a commercial property investment manager, visiting a site and observing for yourself the comings and goings of people, recognising the necessary evolution of properties’ use and meeting those challenges via the assembly of a quality mix of real estate units remains as imperative today as at any time before. Remote learning is great for some things but in property nothing beats boots-on-the- ground evidence gathering.