25 Jan 2019
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Fiona Rowley and Justin Upton, co-fund managers of the M&G Property Portfolio
It’s no secret that UK retailers have struggled in 2018. The pressures faced by those at the sharp end of competition from online shopping and changing tastes, often combined with their own challenges, have been well documented.
While headlines can paint a gloomy picture, investors in commercial property should not lose perspective as the retail sector continues to not only play an enormous part in the UK economy, but within the property market too.
It may be fashionable to write off the sector, but we believe retail assets remain an important – and valuable – part of any balanced approach to investing in commercial property.
Shopping in the online era
Digital commerce has grown rapidly in the UK, which today has one of the world’s highest rates of online retail sales. Yet the vast majority – over 85% – of transactions still involve a physical store.
Alongside the sales generated within retail stores, shops paradoxically play an important role in supporting online sales channels. Even online behemoths like Amazon recognise the value of “bricks and mortar” and have started developing physical footprints.
Not only do stores act as shop windows, but they also facilitate valuable services like ‘click and collect’ – which is often more convenient than delivery – and enabling returns.
Much as consumers blend their online and in-person spending, retailers are keen to ensure they have a broad offering to stay relevant and meet customer demands.
Location, location, location
Some parts of the retail property market are inevitably more challenged than others. Generally speaking, poorly positioned shopping centres and many high streets have been worst affected by store closures and vacancies over the past year. Meanwhile, the capital value and rental incomes from prime retail assets have remained more resilient.
Prime locations are not only well-connected to where people live and work, but are also often underpinned by supportive demographics. As well as offering convenience, they can offer an enjoyable experience for customers. After all, shopping is a popular – and often expensive – pastime for millions.
In these ways, we would expect quality property assets to be more successful in attracting and retaining good tenants, especially in a challenging retail climate. Lower vacancy rates, in turn, will help ensure a more reliable income stream for investors.
The value in diversification
As ever, the prospects for the commercial property market are somewhat dependent on the health of the UK economy, the outlook for which will remain blurred by Brexit until its terms are finalised. Irrespective, we expect income to be the key driver of total returns for investors in commercial property over the next five years. Diversification of assets, as well as their quality, should help insulate investors from downturns in any one part of the property market.
With industrial property values having risen considerably over the past five years, they no longer offer the attractive yields they traditionally did. It is instead retail assets, having generally not risen in value over the past decade, that can now contribute higher yields to a diversified property portfolio.
The valuable role that commercial property, as an asset class, can play as a diversifier for investors was demonstrated in 2018. In a year that saw most stockmarkets shed value, and when many bonds delivered negative returns, UK commercial property remained relatively resilient.
We are confident that owning a balanced and quality portfolio, with a broad array of properties diversified across sectors and geographies, puts investors in a strong position. Retail may not be in vogue, but we believe it remains a diverse sector that can offer both income and value over the long term.
Please note, the value of investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.