QuotedData’s Richard Williams surveys the retail and industrial property sectors – Balancing yield and risk in the property sector
Investment Week, 2 December 2019, Richard Williams
The lure of an attractive yield has made property companies and real estate investment trusts (REITs) particularly interesting at the moment. But, of course, with a healthy yield comes some pretty unhealthy risk – just look at the retail property focused companies for evidence of this.
The structural shift impacting retail is well documented – the rise of online shopping (now almost 20% of retail spend) has put many traditional high-street retailers in the mire. It has seen many bite the dust and almost all go through some form of ‘right-sizing’ of their store estate.
The effect on rental income for retail landlords has been monumental and has led to huge write-offs in property values and left many trading at significant discounts to net asset value (NAV).
The fall in property values and share prices of retail-focused companies are getting to a level that must be making the sector interesting again for opportunistic investors. It was certainly the case for South Africa’s largest REIT Growthpoint Properties, which bought a majority stake in Capital & Regional last month and plans to grow the company with an £78m injection of cash.
Capital & Regional’s share price, which had fallen 173% in three years, was a big reason behind the deal but even bigger was Growthpoint’s belief in the UK shopping centre sector – especially the community-focused malls that Capital & Regional deal in – and the management team behind it.
It is hard to not get swept up with all the negative headlines surrounding retailer failings. However, there are areas of the retail property sector that are emerging as potential growth spots. Growthpoint believes it has found it with community-focused shopping centres, on the premise that tenants of these malls are less impacted by online sales.
Retail parks is another sub-sector that has an interesting demand dynamic. The rise of e-commerce has led to a rise in click-and-collect services, as free deliveries, failed deliveries and returns eat into the retailer’s profits…
While the retail property sector has suffered due to the structural shift in consumer spending, the industrial sector has certainly benefited. It has been on a heck of a ride over the past five years as the growth in online sales boosted demand for warehouse space which in turn has boosted rental growth and property values. The sustained growth has led many to question how much further it can go.
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