From Brexit to Covid to ecommerce and agile working, there have been a litany of problems for the commercial property sector. Could there be better times ahead?
- The reality for the commercial property market may be a little more complex than the bleaker assessments suggest
- The retail and office markets have pockets of strength and there may be some change of use to support prices
- The investment trust sector is currently trading on significant discounts to net asset values, offering a margin of safety
It is easy to paint a bleak picture for commercial property. The structural changes to the retail market have been well-documented, while the outlook for the office market looks uncertain. Even pockets of the brighter industrial market look vulnerable to an economic downturn. However, prices have slumped. Have they fallen far enough?
The reality for the commercial property market may be a little more complex than the tougher assessments might suggest. Retail is still difficult: the move to ecommerce presents problems for high street shops, while fashion-led shopping centres are unlikely to revive in the short-term. However, this is not the whole picture. Some parts of the market are doing well: discount retailers, for example, and supermarkets are still creating demand for retail space.
As the vaccine roll-out progresses, some companies are putting plans in place for a return to the office. It is clear that the office will not look the same as before. It is unlikely that employees will want to rush onto crowded commuter trains to sit in crowded offices. However, it is likely that an element of FOMO may creep in as others return to face-to-face collaboration. Instead of drastic reductions in space, it may be that office space is re-engineered to fit a more agile workforce.
While it is not true to say that a building is a building, there are some signs that landlords are trying to encourage flexibility from the planning authorities to change the usage of buildings where appropriate. While it will be difficult to change a City office into a block of flats, there may be a change of usage at the margin. The government is currently considering a number of proposals.
The final area is industrials. Logistics warehousing has been the golden ticket over the past 12 months, fuelled by ecommerce and shrinking supply chains. There seems little danger that this trend is about to roll over, even with yields relatively low.
In reality, it’s still difficult to make the case for an open-ended commercial property investment. There still could be revaluations lower and there is a constant threat of a lock-up. However, the huge (30-40%) discounts to net asset value seen for the investment trust sector may be on the cusp of offering value. While no-one is predicted a significant turn in fortunes for the sector, it is plausible that the worst is behind it.