We like a contrarian investor and one that will put its money where its mouth is. Well, step forward Regional REIT. The trust this week bought a £236m portfolio of regional offices (growing the size of its portfolio by more than a third) at a time when most are shying away from the sector with the impact of flexible working unclear.
It is part of its strategy, announced in November 2020, of becoming fully focused on offices. It has since sold a portfolio of industrial assets and intends to dispose of the small amount of non-office assets remaining in its portfolio soon.
Regional REIT has firmly nailed its colours to the mast on the future of the office debate. Its conviction in the sector comes from a supply-demand imbalance in regional cities.
Supply in the top eight regional locations is at historically low rates at 6.9%. This is well below the 10-year average of around 10.5%. This supply shortage has been precipitated by the conversion of secondary, grade B and C offices being converted into residential under permitted development rights.
On the demand side, it says the assumption that a rise in working from home will directly result in lower demand for office space is too simplistic. The office will still be required in a flexible approach to work, and for health and safety reasons it believes space per employee will increase.
Office space per employee has been falling dramatically over the years but is forecast to increase again post-pandemic. In the 1990s an average of 425 sq ft was provided per employee. This had fallen to 225 sq ft in 2010 and to 150 sq ft by 2020. It is thought this will go back up to 200 sq ft per employee by 2025.
Regional REIT said that a 40% reduction of workers in the office through working from home equates to a desk reduction of 20%. When meeting rooms, lifts, corridors etc are considered, it means a 10-15% reduction in floor space.
Factor in the growing space requirements per employee, and the group believes that overall office space requirements will not fall significantly.
With a dividend yield of 7.2%, which was covered by earnings last year, and potential future earnings growth from the new portfolio (which has 22% vacancy) Regional REIT could be the contrarian worth backing.
QD view – Contrarian view worth backing?