UK commercial property price averages are misleading. That was the message from Frank Sanderson of Schroder Real Estate Investment Trust to Sub35 event delegates.
While prices have risen 5.5% since their post EU referendum slump and are up 2% in aggregate, significant structural trends have led to disparity between the sectors.
‘The best-performing sector on a month-to-month basis has almost exclusively been industrial and on the bottom end it’s almost exclusively been retail,’ he said at Pewterers’ Hall, Barbican.
‘That is the biggest and most obvious structural trend going on in the property market, online shopping being an example of that and the fact that retailers need less physical space and in turn need more industrial space. The knock-on effect [is felt] across the whole industrial sector because there’s more competition for space.’
There is polarisation within the sectors too. This is most acutely seen in retail where there is long-term demand for convenience stores and retail destinations like Bicester Village in Oxfordshire and Westfield in Stratford, while those that are ‘not the prime catchment dominant scheme in town… have seen and will see continued pain’.
Conviction call
Sanderson pointed to people being broadly surprised how resilient the London office market has been following the referendum. The team’s biggest conviction call, however, is regional offices.
Since 2008, vacancy rates have come down in the big six markets – Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester – with new supply being scarce.
‘Our strongest conviction call at the moment is regional offices because the supply is low, demand is strong and actually of all the sectors this is the one where rental growth hasn’t come through as much as others,’ he said.
The trust also has a focus on mixed-used assets where investors benefit from ongoing demand for offices up top and retailers down below. Its largest asset is City Tower, a 30-storey skyscraper in Piccadilly Gardens, Manchester.
‘We’ve got 600,000 square feet of offices and below it we have Lidl, Costa and all sorts of people you’d expect and they all trade very well.’
Despite political uncertainty, Sanderson highlighted tenant demand being robust, lenders being disciplined and investors sitting on the side-lines ready to deploy capital.
‘The key driver for real estate, as with most income asset classes, is the [interest] rates outlook. The view is changing, particularly with the US going lower. At the moment, there is premium between prime real estate and gilts of 2%-plus – that is a sustainable level.’