Property investors need to separate ‘wheat from chaff’, says SLI’s Anne Breen
Anne Breen, head of Real Estate Research & Strategy at Standard Life Investments, says that better quality commercial property assets continue to rise in value, despite the severe recession hitting many European high streets.
Today, the key phrase which encapsulates the global commercial real estate market is ‘best versus the rest’. This is the result of a marked divergence in the performance of commercial property since the bottom of the cycle in 2009, based on preferences for location, asset size and income quality. The scale and severity of this bifurcation has surprised some investors. However, the changing landscape of flows, yields and innovation also presents attractive opportunities for longer-term investors.
Let us first consider the polarisation of real estate performance. For example, best quality shopping centres in the UK have increased in value by 22% in the last three years, while poorer centres have experienced a fall of 10%. Similarly in the US smaller neighbourhood centres have been declining in value since 2008, while super regional malls returned on average 15% in 2012 – indeed, top decile retail delivered returns of 30%. This trend of diverging fortunes is equally noticeable in global office markets where investor demand has forged a strong recovery in prices across key international core locations such as Paris, London, New York and Munich. In contrast, the recovery in non-core centres has been much more muted in Germany and the US, while in the UK and France there has been little or no recovery in values since 2009 outside of their capitals.
Such a profile demonstrates the impact of four years of sluggish economic growth on corporate profitability. In the UK, 2012 was the worst year for retail failures since 2008, with 4,000 stores and more than 48,000 employees affected. 2013 could be as bad – surveys suggest 3 in 10 companies in the UK are currently loss making and 1 in 4 are either only paying interest on debt or struggling to pay on existing terms. Should investors be concerned? Clearly yes – jobs are at risk, local high streets are changing beyond recognition and European banks are rapidly withdrawing support from many businesses.
That said recessions create opportunities for new firms, who can press ahead with innovation. A number of operators are still expanding or even developing new concepts and formats in which to sell their goods. Both retail and business sectors are part way through a technology revolution. In terms of shopping trends, this is driving demand for larger stores in ‘showcase’ locations, perhaps using ‘click and collect’, but also supports ‘niche’ operators in local units who increasingly sell internationally through multi-media channels.