Speaker 0:
Hello and welcome to our latest winter flood panel session, which focuses on the commercial property market. I'm Emma Bird, head of research at Winter Flood Investment Trusts. And today I'm joined by three experienced property investment trust fund managers. Richard Shepherd, cross manager of Custodian Property Income Re. Laura Elkin, manager of a EW UK re, and Jeff O'Dwyer, manager of Schroeder European Real Estate Investment Trust.

Speaker 0:
Today we will be talking about the recent trends in the commercial property market and the outlook for the future.

Speaker 0:
So a key theme across markets across over the last 18 months has been the rising interest rate environment and Richard, what impact has this had on your portfolio in the short term? And what do you expect the long term impacts to be?

Speaker 0:
Uh, the

Speaker 0:
immediate impact of the rising interest rate, of course, has been to valuations, and we all witnessed valuations correcting very sharply in the fourth quarter of last year. I think that for the first time in, uh, to recent cycles, the property market acted very quickly and very logically to that change in interest rates for us. Aside from the valuation impact

Speaker 0:
we have always had a, uh, low, uh, cost of, um, debt. Uh, we've always taken a low risk attitude to debt. So the majority of our debt is fixed rate,

Speaker 0:
and our weighted average cost of debt is currently 4% and the average term of that debt is six years. So the immediate impact on servicing that debt, uh, is very limited. The greater impact has been on the valuation of the sector.

Speaker 0:
Uh, Laura, do you have anything to add to that that similar impacts on your portfolio? Yeah. I was just gonna touch on that first point that Richard made about, um, the pricing correction. And I completely agree with Richard that, um I think the the commercial property market as a whole reacted very, very swiftly and very well to that. And that's welcomed by by farm managers. Of course, when values are out of line with the market or felt to be out of line with market, and that really sort of ties our hands as as fund managers. And thankfully, in the in the fund that I run at a WU,

Speaker 0:
um, we were entering that period with quite a lot of cash to spend and and I found that that period actually created a lot of opportunity for us. Of course, there was right sizing of values which impacted NAVs. But we found that that was a rich time of opportunity. Um, for a value strategy to be buying, um, And then, um,

Speaker 0:
lower volume levels that we've seen in the investment market and the, um, lack of pricing full transparency that we've seen since that time has created more opportunity for us.

Speaker 0:
On the flip side, though, the the the high levels of of inflation that we have seen in the market um, have, of course, been putting pressure on our tenants. Um, I have been pleasantly surprised so so far throughout this this period of high inflation,

Speaker 0:
Um, that hopefully will be coming to an end, Um, in in coming periods. Um, by the resilience of our tenants to that, I think sort of going back to the start of that period, Um, had we sort of seen how prolonged that period of high inflation would be, I would probably have some higher concerns than I think have have have played out. So yeah, pleasantly surprised by by that impact impact.

Speaker 0:
Great. Thank you. Um, and on that theme, do you think that debt financing is still a viable source of funding for commercial property? Um, given the the differential between the cost of debt and the yield you can get on commercial property at the moment,

Speaker 0:
I think, um,

Speaker 0:
certainly for for high returning and for high yielding strategies over the long term. Yes, yes, definitely. Um, I think it's difficult to see at the moment where, UM, strategies are requiring debt at today's rates, Um, and then competing in the market with strategies who have lower fixed costs of debt that were fixed in some year 18 months ago. It's hard to see how those strategies can can be competitive in today's market.

Speaker 0:
Um, speaking of of our own strategy at a EWU, um, we fixed our cost of debt just under 3% back in early 2022 for five years. And I'm I'm very grateful for that. Of course. Sat here today.

Speaker 0:
Um, so, yes, I absolutely think that's that debt can continue to be a viable, um, part of the commercial property market, and it can continue to to to boost returns. Great. Thank you. And Jeff, uh, in in Europe, Is there a similar trend? Have you seen similar impact from the rising interest rate environment? Yeah, it

Speaker 1:
definitely has been an impact. It's probably slightly been protected with the inflation clauses that exist with all the leases in in Europe. So although you've had yields sort of blowing out,

Speaker 1:
you've had rents increasing on the back of the inflation pressures that we're facing. Europe's also probably been a little bit slow to react. Hasn't probably reacted to the same sort of sharpness as what the UK has, Um, so there's probably still a little bit more downside across certain sectors. Um, I think at the prime in which we're not an investor in prime real estate. But the prime end has probably been the one that that has probably suffered the most. Where you had industrial yields, that sort of sub 3% of office yields mid two, and it's little,

Speaker 1:
little, um, exactly why that that sort of yield profile would blow out, given where rates have got to. So the fact we don't operate in that space We've been, um, sort of slightly protected where we're more buying good quality real estate off yields between sort of five and 8%. Sort of and blended sort of 6%. So coming back to the other, the other question about well, is debt accretive? Well, yes, it still is at that sort of yield profile as well.

Speaker 0:
Great. Thank you. I think, Um, just just to to cut in. I think. For the last 15 years, we've had virtually zero interest rates. So for a lot of investors, um, any form of, uh, of, uh, debt, um,

Speaker 0:
could acquire prime assets and still be a creative.

Speaker 0:
And what That that that has meant is that, um, secondary strategies have been rather sidelined because there was no benefit in buying secondary property because you could still see a margin buying prime. And I think this is why we saw And as Jeff mentioned, such pressure on the prime end of the market that yields are got in in the UK, you know, into the sort of 33 and a quarter percent for industrial, which are absurd yields for real estate.

Speaker 0:
Because there was so much pressure, uh, both coming from debt funded and equity funded buyers. And for the first time in 15 years, People are actually having to ask the question, What is good value in the secondary market? What can I fund with debt? Uh, and this is a market that we're all used to operating in, you know, prior to collapse in interest rates.

Speaker 0:
And I think it'll make for a much more normal market than than the one we've been operating in. So I think they're really interesting times.

Speaker 0:
Great. Thank you. Um, one of the key trends around the pandemic. Um, when lockdowns were first introduced, um, was that there was a wide range of cuts or even suspensions of dividends at the property investment trust level. Um, are you seeing pressure on dividend cover or your dividend payments? Um, at your funds at the moment. Uh, Richard, start with you.

Speaker 0:
We have, uh, always maintained that a fully covered dividend, uh, was sacrosanct. Uh, and it has informed our investment strategy. It's informed our debt strategy. It's informed our growth strategy over the last nine or 10 years since we launched custodian property income rate.

Speaker 0:
Uh, we did reduce our dividend, uh, in, um, covid. Uh, and it's certainly the case that the increase increase in interest rates means that it's unlikely that we will see in the dividend getting back to the levels they were pre covid.

Speaker 0:
Um, but I think that, um,

Speaker 0:
dividends are a sensible level. They're affordable. Uh, and we don't see pressure today with interest rates where they are, Um, for for that to change?

Speaker 0:
Yeah. And Laura?

Speaker 0:
Yeah, a W. I think we clearly run, um, a slightly different policy to the one that dividend policy to the one that Richard has just just described. Um, we have paid, um, an uncovered dividend. Um, for some time now, although, if you look back since the IP O of a WU, our dividend cover has been around 94%

Speaker 0:
where it has been uncovered, we have chosen to top that up through profit made through, um, capital profit through profitable sales. Um, so not the returning of of original capital. Um, but capital profit. Um,

Speaker 0:
we were therefore the the only diversified route I think in the UK not to cut or suspend our dividend during the pandemic.

Speaker 0:
Um, and And similarly, um, we we feel able to to continue with that today. Um, I would actually say that the converse to to to what you're suggesting. Um, so over the course of the last two years, we've been working towards getting back to full investment, um, to to, um, push our dividend cover back up towards its target. So we've been building our dividend during this this period of time we're discussing,

Speaker 0:
um, and and, yes, we've been able to do that, um, and and have shown good progress in that and will continue to do so. I believe so. So, yeah, we've We've found that, um,

Speaker 0:
momentum in our strategy and in our asset management particularly has allowed us to continue to drive our dividend cover during that period.

Speaker 0:
Thanks. And

Speaker 1:
yeah, for the European Trust, it's a little bit more unique. We did a fairly substantial asset management repositioning in Paris, where we sold our largest office building. So, through the sale, we were always going to be uncovered until we reinvested that capital. So that profit that we created, we were able to give some special dividends back to to investors, which is quite unique.

Speaker 1:
We were then, in a situation where we had to reinvest that capital we weren't seeing value. So what? We decided to do, Um, just to re look at the portfolio and start thinking about Well, how can we invest in the portfolio, particularly from a sustainability point of view? And we'll talk about that in a bit more later. So on the back of that, we've decided, actually, well, let's keep the strongest balance sheet possible. Let's keep our gearing levels at circuit 23%. Let's rebase the dividend back to a covered approach similar to what? What Richard was saying earlier.

Speaker 1:
Um, and therefore we've got the strongest company to deal with, going forward to deal with the headwinds that we have and therefore have a progressive dividend as we create value through through that asset management that I've touched on.

Speaker 0:
That makes sense. Thank you. Um, just going back to something you touched on earlier, Laura about transaction volumes. And you said that they noticeably fell off after the mini budget and last year, Have we seen that pick up at all in the UK? And does it vary by the sector or or asset?

Speaker 0:
I think we have seen that pick up somewhat, um, accepting perhaps the summer period, which is notably always very quiet in commercial property transactions. Um, yeah. We've seen a pick up since, I think the sort of very first, um, initial reaction to the, um, prime minister's mini budget back last autumn. Um, when volumes initially dropped off. Um, but I think that's perhaps expected during any period of, um,

Speaker 0:
market hiatus Where, um, as at some point there will come a point where sellers will need to sell assets or or will want to sell assets just due to, um, sort of where they are in their life cycle. And and, um, volumes have increased. And particularly, I would say, in in in the industrial market, which, of course, saw that sort of very initial hit, um to to to or perhaps have the most severe hit back in at the end of last year to to its prime values.

Speaker 0:
I think there's been a strong realisation that the that the occupational um, market is still very much behind that sector. Um, and that has driven continued activity there. Um, I would say that hasn't been seen, um, to that extent in other sectors, particularly in the office market. Um, I think there's still a lot of, um,

Speaker 0:
perhaps stabilisation to go on in in that occupational market. And I think that is adding an additional hindrance to, um, investment volumes. Um, in retail. Um, we certainly have been driving some activity, and we like to be countercyclical buyers. So I've been finding some opportunity there.

Speaker 0:
Ok? And in Europe, what are the, uh, transaction trends,

Speaker 1:
then? Yeah, there's still an element of price discovery still going on. We probably haven't seen the full correction, particularly on the office side. Um, I guess the challenge challenges that offices have really driven by. What does the occupier want? Um, on a post covid basis, obviously wanting, um, better but smaller footprint or smaller level of office space. Um, so that's something we're still still juggling. And then the sustainability question. Well, what is the optimum building,

Speaker 1:
Um, that these larger occupiers want. So that's the challenge that I don't think has still been reflected in most sort of office values. Values to date.

Speaker 0:
Thanks. And something, um, Laura again touched on earlier was that she said that she'd been pleasantly surprised by the resilience of, um, your tenants in the current inflationary period. And Richard, have you found similar things or have you seen inflationary pressures and have hit your tenants in any way? Uh, not not that we have, Uh, not that we picked up in terms of rent collection. Rent collection is very strong. And I think Laura is absolutely right. Um, tenants have been very resilient,

Speaker 0:
um, and that we we've all sort of mentioned rental growth so far, But this is the great untold story at the moment. Rental growth is the most exciting thing in real estate at the moment is what's going to provide, uh, the dividend cover in the future. It's going to pay for the increased cost of debt. It's gonna drive, uh, performance in terms of net as value.

Speaker 0:
Speaking to our tenants, um, I spoke to one or two chief executives who who you think, Why would they say this to me? But they say, Listen, of all the costs of running our business, rent isn't really one that we worry about. It's not the particularly significant cost of running the business compared to staff costs, wage, inflation, compliance cost. That's enough to send a shiver up anyone's spine. All those costs have increased significantly, and rent really hasn't you know if you look at back over the long term

Speaker 0:
you rent has probably kept pace with inflation, which comes back to that age. Old questions whether the property is a good hedge against inflation, and the answer is it is when rents are growing and rents are growing.

Speaker 0:
So we're certainly seeing an industrial sector from retail. They're coming from a very low base. You know, we've seen rents falling over six years, and I think there really is some opportunity for rental growth in retail. Yeah, that rental growth is going to, uh, is going to continue to support investor demand. And I think that we will see an increase in, um, trading volumes because there's quite a lot of money waiting to invest. But everyone is trying to wait until they know they're at the bottom.

Speaker 0:
And Jeff in Europe, you touched on earlier that there's more inflation linkage in the leases. Is that something you're seeing putting pressure on tenants, or is it still affordable?

Speaker 1:
So across our portfolio, every one of our tenants has paid that index, and that's ranged. Probably the lowest level is in France at around sort of 5 to 5.5% through to the Netherlands being around 14% so pretty sizable. But we haven't had any issues with with payment.

Speaker 1:
I mean, one of the things that we are coming from is fairly low rent we're typically looking at when we have part of our strategy buying assets that are least off affordable, sustainable rent. So that's put us in a great position to deal with this indexation that that's coming coming through. We are working with our tenants about saying, OK, well, we're going to invest and make, um,

Speaker 1:
the sustainability side. How can we improve and reduce operating costs for them? So that is a sensitive point so that total occupancy cost, um that they they face. And we can look at trying to reduce that that service charge as a means of trying to reduce their overall cost. But now we're 100% rent rent collection, um, and have been, um, and very strong through the pandemic as well.

Speaker 0:
Thanks. Um, and following on from that, Laura. And do you find inflation linked leases attractive? Is that something um, you look for when, um, putting in leases in place with tenants? Or is it not? Something you have much exposure to.

Speaker 0:
We don't have a high exposure to it to a WU. Um, and that is generally because, um, very, very typically speaking, those, um, longer inflation linked to leases as they've often been in the market over the past 5 to 10 years have traded often at much keener yields than you would find your shorter leases or your more traditional income profiles, trading

Speaker 0:
and at a W in our value strategy. Um, of course, we're not looking to buy assets at their peak value, which is often where you see those, um, long inflation linked leases trading. So we have generally not been buying those leases and favouring, um, the acquisition of short

Speaker 0:
released assets. Um, that are able to trade more in line with capital values that are, um, in line with sort of long term fundamental values like vacant possession or alternative use values we use as sort of key indicators of the types of values we want to be paying for assets on purchase.

Speaker 0:
That said, though, um, we, we see it as a big area of opportunity to when we own the assets. Um, when we get to lease renewal try and put in place an inflation link linked lease. Um, now, of course, that's not something we can do in every case, but we have had some very significant, um, profits made in the past. Um, I can think of an office building in so, uh, let to the government where we we bought it for around 5 million. We put in place an inflation linked lease. We were able to sell it for around 11 million,

Speaker 0:
um, and similarly, with an asset in Oxford that we sold last summer made significant profit on that sale by putting in place an inflation linked lease. So I think in our strategy, we would be doing that ahead of sale, looking to capitalise on the profit and then reinvest into something higher yielding.

Speaker 1:
If if I can just comment on that, I mean, one of the things that we do look at outside of the inflation linkage. Obviously the leases

Speaker 1:
do have that, but we fundamentally look at the locations, the micro micro locations that if you're benefiting from supply constraints and you're in areas where there's competing demands for users, you're naturally going to get rental growth. So inflation is a slightly secondary point to that that actually you're buying the fundamentals of the location and seeing that growth coming forward. So therefore, if you've got a five year lease, you're getting to market and you can put in place that that rental increase anyway.

Speaker 0:
And I I would agree with what they've both said,

Speaker 0:
Um, but we've got to understand what we mean by an inflation linked lease, because certainly in the UK, what we normally mean is a level of indexation that is capped at typically three, maybe 4% per annum. If you're lucky, that's not inflation linkage in this market. And I think that right now you do much better taking your chances with open market rental growth, which is much stronger

Speaker 0:
and the other added complication of inflation linked leases. And Laura has hinted at some you know, fantastic results by putting those leases in place. But all it shows is that someone is massively overpaid for that asset. People tend to overpay for assets that, with on long leases with inflation linkage, because they just think, you know, this is yeah, this is better than goals. It's gonna go up. Inflation can't go wrong

Speaker 0:
and as an industry, we're bad at valuing those assets both in terms of sale prices but also, uh, annual valuations. We tend to overvalue those assets. And suddenly, in the last 2 to 3 years of that lease, there's a realisation that the rent has got to come back to market levels. And then you see those values crash at the end of those long leases.

Speaker 0:
Um, so I think you're better to stick with open market valuation understanding you're buying real estate, not some financial instrument with inflation linkage. Buy real estate. Enjoy the rental growth you get for the market. But make sure you bought those properties in supply constrained areas with good fundamentals.

Speaker 0:
Great, thank you. If I could just, um, look quickly at the US market. There's been a lot of concerning headlines so far this year regarding the US commercial real estate market in terms of access to debt financing, following regional bank failures and conservative concerns,

Speaker 0:
and key cities like San Francisco and New York and their office markets. And do you think that's something? Are those concerns also here in the UK market and and then we'll go to continental Europe as well, Richard. Well, it would be nice to think that San Francisco is a long way from London, but

Speaker 0:
it tends to be the case that what happens in the States does patterns of behaviour in the States do tend to come over the UK.

Speaker 0:
But

Speaker 0:
property is not a homogeneous asset. Um, it's been much talked about over the years by anyone in property. And the underlying fundamentals of individual markets and individual properties are perhaps, uh, of greater interest probably to the three of us as fund managers than general market trends. Which, of course, we need to, uh, pay heed to,

Speaker 0:
um,

Speaker 0:
they're walking through the city today. It's a Monday. It's September. It's very warm. I'm sure a lot of people would be like to be working from home today, but the streets are busy. Tube is busy,

Speaker 0:
I think, Um, broadly, we're seeing people certainly back in the offices three days a week. And whether you need offices three days a week or five days a week, you need offices. Uh, so I am not such a gloom monger as, uh, as many commentators on the office market.

Speaker 0:
Um,

Speaker 0:
debt markets in the states again you know what happened last autumn happened because the Fed put up rates and we had to follow suit. There was also an extremely badly timed mini budget, but it was fundamentally the increase in interest rates that had the impact on our market. So certainly what happens in the States has an impact over here. But as to, um,

Speaker 0:
occupiers behaviour, I think, uh, I'm more optimistic than some of the news that's coming in New York. Certainly. We see it in in London and some of the big regional cities in the UK. We are seeing people back in the office,

Speaker 0:
so, um, maybe not quite so gloomy as, uh, you you're hinting. Thanks, then, Laura. Yeah, I would agree with Richard. I'm I'm not full of doom and gloom II. I have have a belief that the office market

Speaker 0:
occupation levels, um, that we will still see some stabilisation. Um, but, you know, picking out a few recent headlines. Um, you see, Google, you see Amazon calling staff back to offices with them having I think committed very quickly after the pandemic that that that would be the new, um, policy to have for working from home and now that's that's being revoked.

Speaker 0:
I've seen seen some London banks, um, you know, asking very recently making, making calls for, for, um,

Speaker 0:
staff to return to offices. So although it's very easy to sit here and think that

Speaker 0:
the pandemic and lockdowns felt a very long time ago, actually, we are. We're yet to see that stabilisation complete. Um, and I'm with Richard. Um, office is a very important part of of of my business. Certainly, Um, and and the the benefits that we get from working in the office are are immeasurable. Now, I'm not saying I don't believe in hybrid working or or working from from home some of the time,

Speaker 0:
Um, and perhaps in some businesses, that does work. But I think for the majority of us, we need an office. The office market is here to stay, but I do think we'll continue to see some stabilisation.

Speaker 0:
And Jeff in Continental Europe.

Speaker 1:
Yeah, I think it's very dangerous to read through from what's happening in the States. I think some of the trends will come across, but you've got to think about the state of those markets in terms of the amount of oversupply that they have, where people live in America, the fact that they commute a long way. Whereas for a number of the continent's European cities, people are in urban locations, they can get to the office. So a lot of people here and you and I have come in from Hertfordshire today, so it's a decent commute. Most people, whether it be in ST Paris, Hamburg,

Speaker 1:
uh, Frankfurt, everyone sort of lives much more urban area. So it's less of an issue in terms of getting people back. And we're seeing that now in terms of the statistics that are coming out, that people are using the office, um, across, um, those those cities are stronger than in, say, the UK or or in America. But again, that supply side, the fundamentals are are much, much stronger. I mean vacancy rates and still is an example of 2%.

Speaker 1:
I mean, I can't see that city going to 35% vacancy, which is what San Francisco has. So, um, I think it's very dangerous to to to read through the statistics, but I think some of the trends will come through in terms of the way people use the office, the type of office that we need to provide the attraction of getting people back into the office. Um, but again, Laura's point about how important it is in training people, just mental mindset, infrastructure. It's all very, very key. Um, and I think the office will continue to be to be strong,

Speaker 0:
So officers are still investable. It is

Speaker 1:
select offices. I mean, it's like any any sector, um, that there's going to be winners and losers, um, and that ability to to to create value and and change those probably poorer buildings into better quality buildings that are in demand. Um, and and those fund managers or asset managers that can do that? That's where the value is gonna be. Credit.

Speaker 0:
We are. Um I'm sure I'm not alone in being asked about stranded assets over the last, um,

Speaker 0:
few months, and I don't think we can just make up a new term and claim it's a problem. A stranded asset in the in all sectors is just obsolescence, and obsolescence in real estate, particularly in offices, has been a feature since time began,

Speaker 0:
and the the the offices we work in today are very different to the ones we worked in at the start of our careers, and they'll be different again in 10 years. We are seeing the pace of change being forced by the enforced lockdown that we all experienced through the pandemic. Um, but we we mustn't forget that apart from being important for all the business reasons that have been identified,

Speaker 0:
the office is also a huge social part of everybody's lives. People come to work to see their friends to go out, um, with their friends after work. And, um, fundamentally, the need for human contact is a very primal thing. So I think that offices will remain important. But the type of offices we need to, um provide

Speaker 0:
are going to change as they always have. Uh, and we're going through a process of change at the moment. So, you know, I'll probably talk about it some more as we go on. Yeah. So expect a polarisation between prime and secondary office assets or would you not describe them as well? But we saw we saw it with, um, permitted development. Reams and reams of buildings were taken out of office use as they went to student development, residential development

Speaker 0:
Uh, and in some regional, uh, cities there was, you know, the 60% of the market was secondary basically unusable offices, but they were those really poor quality offices were suppressing rental growth because landlords were always challenged with, Well, I could get some offers for the 10,000 square foot next door, But when they're taken out of the food chain because they go to student living or, um uh, or residential or hotel or all the other uses that we've seen,

Speaker 0:
then that's really positive for the office sector. So this is a there's there's a continuum here, Um, and to to look at it, uh, at a moment in time and say the office sector is dead is to misunderstand what's been going on for 20 probably 50 years,

Speaker 0:
OK, and so moving on to the industrial and logistics sector. Obviously, you saw, um, a prolonged period of that sector being, uh, one of, if not the best performing sector and in the real estate market. And do you still think that the structural tailwinds are as strong as they once were? Or do you think there might be some further rep to come? Uh, Laura that with you?

Speaker 0:
Yeah. I think there there are still some very strong headwinds there. Um, as as I think Richard touched on earlier when he was talking about rental growth. Um, we see this is a really exciting sector for rental growth. Um, we've still got a a very high weighting to that in our portfolio.

Speaker 0:
Um, I think our average passing rent on on industrials is still well under £4 per square foot. So incredibly low when you look at that across the market as a whole. Um, so, yeah, I think it will be a sector that continues to to to grow. Um, that has that occupational demand.

Speaker 0:
Um, and what we're seeing with, um, sort of wider headwinds in the economy. Um, there will be less development than we had seen, um, over previous years. So, yeah, I think it will, um, be a time to to to really see that rental growth come out of of the existing assets.

Speaker 0:
And, Jeff, are there any different dynamics in Europe? No. Other

Speaker 1:
than I think we're probably coming from a slightly lower base on the continent. We haven't seen the same level of rental growth, particularly say for urban industrial as what you've seen in some of the bigger cities here in the UK. So again, that that word about being excited around rental growth, I think definitely for for multilateral or for urban industrial in sort of key cities on the continent, That's where we see stronger growth.

Speaker 0:
And then on on the flip side of that, Over recent periods, High Street retail has often been one of the worst performing sub sectors. Is this now an area that's maybe starting to offer value? Or is it still, um, somewhere that you wouldn't invest in Richard? Uh, well, we would invest in. Indeed, we did. Um, uh, last year, we acquired two shops in Winchester, and Winchester is one of those cities that has always been considered very prime.

Speaker 0:
Uh, and, uh, and I think that remains the case today. So the, um, the locations where high street retail will still work, given it's coming off very low. Base rents is where there is high footfall caused by tourism. It's a cathedral. Cities, universal cities, the likes of Winchester and Oxford and Cambridge and York. We're still gonna see, um, busy, busy high streets. Um

Speaker 0:
Of course, these shops have become much more affordable because rents have fallen. And this seems like a bad case to make for retail being a good investment in the fact that rents have fallen. But it has made these assets much more affordable for occupiers. And I think occupiers have

Speaker 0:
have started to understand that, Um, because we had we had an experiment through lockdown as a nation as to what a fully online retail world would look like. And through that we discovered those retailers that were going to survive and those that worked and those that were going to go fully online or those that were going to move out of town and focus on click and collect.

Speaker 0:
Uh, but there are plenty of retailers for whom the High Street, uh, is still their ideal location when mixed with leisure. And we're seeing more, uh, restaurants and coffee shops coming into those prime high street locations where previously were priced out to the fringes. I think prime high streets, um, offer a really interesting opportunity at the moment, and you can buy into some of these very prime high streets, uh, at um, net initial yields fully cover the cost of debt.

Speaker 0:
Whereas through the last 30 years, initial yields have been 4%.

Speaker 0:
So real opportunities. And Laura? Yeah, I mean completely agree with that. I mean, anyone who's been following AWS activity over the past 12 months will have seen us us doing exactly that. We've made, um,

Speaker 0:
retail purchases, um, in bath. Um, and in greater London, Um, yeah, focusing on those as Richard has just described. Really? Um,

Speaker 0:
uh, it's sort of, um,

Speaker 0:
via viable continuing locations, um, exciting locations, locations that people want to go to not just for shopping, but for many reasons. For university, for tourism. Um,

Speaker 0:
we've been very selective on location, and I think that's really important going forward. You know, we've seen the contraction of high streets, and I don't think that that will reverse. I think that has been a permanent structural change. Um,

Speaker 0:
but touching on on the point that Richard made about the online sales through the pandemic that that peaked during lockdowns and has since come off. So I think, um, it's it's clear that the High street continues to have a really important role in our in our lives. Um, and if We are very selective about the

Speaker 0:
locations that we're buying there, not only in terms of which town but where in the town is also very important and which retailer we're buying in the town. And some of the retailers and retail locations we've bought recently, um, have been healthy retailers who are trading very profitably from locations. And we know that because of their turnover linked rents,

Speaker 0:
So you think the location is healthy? The micro location is healthy. The retailer is healthy. Um, but then, because of how how much those values have fallen off over over recent years, we've been able to buy them at capital values per square foot. That mean that they we're effectively buying them at land value for for residential development. So you think on so many levels the current income, the current use but also, um, the alternative use is underwritten.

Speaker 0:
Um, we've really protected our downside and brought into an asset that shows, shows some growth potential and provides a high income yield on the way through. I mean, for our strategy. That's absolutely what what we're looking for. So, yeah, it's provided a really exciting, um, opportunity pool for us over the past 12 to 18 months, and I think we'll continue to do so.

Speaker 0:
Um, what we're seeing in in particular retail locations is is that sort of changing mix of, of of retailers that that Richard described, um, the leisure operators coming in more and and the the changes that were made to the use class order. Um, during, um,

Speaker 0:
I think it was around 2020. But just during the pandemic, um, that has allowed a lot more flexibility to come into the retail market, which has really, really helped these changes that we now need.

Speaker 0:
Um, and aside from that, we've seen sort of health care operators coming into to some of our retail line up. So so really just looking to diversify as much as we can that tenant mix. I think a few years ago, if you'd seen a retail park with a sort of, um, health care provider on it, you it would have been sort of red flags. You know, why hasn't that unit bit let to a retailer? Whereas now the mindset has completely changed. It's diversification, and it's bringing footfall onto the park for other reasons, and that will help the other tenants to trade better.

Speaker 0:
Great. Thank you. And in Continental Europe, whatever.

Speaker 1:
Yeah, it's very disparate. I mean, we don't have a clear view in terms of, I guess, being, um

Speaker 1:
um, publish on High Street retail, I think is very select. Um, I think what we do like, though, is more probably urban locations where you have a super supermarket, a scheme with maybe three or four specialties or something like that. That tends to where we have been focused where we have teams on the ground that have strong relationships with those discounters as well. So that's the area where where we would probably allocate capital rather than looking at sort of high street retail, where I still don't feel rents have probably

Speaker 1:
reflected the the headwinds that some of those retailers have as well, so probably probably have less conviction over over high street retail than, um than Nora and Richard.

Speaker 0:
Thanks. And then what about the so called alternative sector? Um, are there any particular types of assets that you're finding interesting in this area? Uh, Richard?

Speaker 0:
I think so. We we don't look at residential at all. Um, although, you know, across the market. There's a popular sector at the moment. I think supply demand dynamics are a positive there for, uh, for, um,

Speaker 0:
rent and rental growth. Um, but within the commercial sectors, uh, and it's been touched on already. We've had some success with, uh, car showrooms. Uh, actually, most of the success there has been having, uh, bought them over the last five years and then selling them more recently to the either to the, um, motor trader themselves or or the franchisee,

Speaker 0:
Uh, because they had a pretty good pandemic. And anyone who's tried to buy a second hand car over the last three or four years or indeed, sell one will attest to that. Um,

Speaker 0:
so, yeah, I mean, we're a broadly diversified fund, so, yes, we always see opportunity that particular to pick out and not any particularly interesting alternative areas. Yeah, we, um we consider, uh, most commercial alternative sectors. Um, service. Richard has said not residential. Um,

Speaker 0:
we have a generally sector agnostic approach. So, considering each opportunity on its own merit, um, I'd say we've often seen, um, opportunity and leisure. Um, and we have quite a soft spot for assets leisure assets that we can buy. Um, often you get a clear visibility into the how the how that unit is trading.

Speaker 0:
Um, and sometimes the covenants aren't always the strongest. Um, but if you can see that that asset is generating a lot of cash flow from how it's trading on its own sort of piece of land, um, then that can be quite valuable in itself. Um, and and perhaps create some mispricing

Speaker 0:
and Jeff anything to add to that?

Speaker 1:
No. Other than alternatives, probably more asset by asset. Um, specific. So we've got two alternatives. One is a car show room that we touched on before in the southern part of France, purely acquired on the basis of an alternate use to to We've got high high residential behind us. So that was the angle we looked at for that. And then, Secondly, we have a mixed use data centre in the Netherlands. Very strong covenant. Um, the cash flow from that was was covering the purchase price. So,

Speaker 1:
um, trying to look at re gearing that lease at the moment, but we're not sort of making a play for data centres or for car show rooms as a general view, but certainly looking at individual opportunities on a case by case basis.

Speaker 0:
Yeah, that makes sense. Thank you. Um, so you all actually touched on there about the residential market? Even though it's not an area that you directly invest in.

Speaker 0:
And we've seen headlines recently about, uh, UK residential rental growth, Uh, reaching all time highs. Does this have any direct read across to the commercial property market, for example, in terms of, um, supporting valuations or, um, is there no direct link there? Uh, Richard, Um, there's a tangential link. Uh, obviously, it's all real estate, but it's really been driven by supply and demand in that particular market and the, um,

Speaker 0:
inability for, uh, particularly first time buyers to get mortgages in increasing

Speaker 0:
increasing demand. Uh, and the government's rather bizarre strategy around buy to let landlords who seem to be held out as rack to a a man, a woman and child that owns a buy to let property, um, at further reducing supply. So it's a complicated market. I'm very glad we don't invest in it, but I think for those that do, um, some good rental growth opportunities.

Speaker 0:
Um, so Laura Overall, which sector do you think offers the best opportunities at the moment and which, uh, offers the biggest risks. Um, and do you think that is impacted at all by whether we're reaching peak interest rates or not?

Speaker 0:
Um, I don't I don't think my answer to that is particularly impacted by where we are in the interest rate cycle. Um,

Speaker 0:
I would say I think we're seeing, um,

Speaker 0:
opportunity in in both, uh, retail and and industrial in in different ways. Um, firstly, an industrial from the industrial that we already hold in terms of their rental growth. Um,

Speaker 0:
we haven't been buying industrial for some time now because of that, um, driver in our strategy seeking value investment purchases, Um, we're finding the purchases in retail. Um, and seeing that as a very interesting area at the moment, um,

Speaker 0:
having commented that I don't think the office market is dead, I I stand by that, but I, I do still think there's some stabilisation to come. So I think that does present short term risks. Um, and why I would be cautious about pricing office investments at the moment. Um, having having said all of that, um, our strategy is sector agnostic on the whole. So looking at each asset on its own merit. But that's broadly a summary of where we're seeing most opportunity and risk at the moment.

Speaker 0:
And, Richard, do you agree with that, or? Well, yes. Again. I mean, you're you're asking a manager of a diversified fund. Um, So, uh, rather than answering your question directly as to which sector, we think, uh, there's most value. I would say that I think there is more value in secondary real estate than there is in prime at the moment. And we saw, you know, the challenges of the prime and the market, which got, you know, overboard and pricing became,

Speaker 0:
uh, um, very toxic in the end. Um, and we've seen a lot of that unravel. Uh, but the the opportunities in the secondary market that has been for so long overlooked for the reasons that I I talked about earlier, I think that's where I see the opportunity for those assets that are well, let that can cover the cost of debt, cover the cost of, um servicing, um, fully covered dividends.

Speaker 0:
Uh, I think they are going to be much more in demand than they have for some time, and that should only be positive for for pricing.

Speaker 0:
And

Speaker 1:
I think and I'll speak specifically about the European trust. But we've kept our a bit of powder dry mainly to invest in the existing portfolio and improve the sustain sustainability and therefore be more attractive from a liquidity point of view to occupiers and investors. In saying that, we think there's probably going to be a bit more buying opportunity over the next sort of 6 to 9 months, particularly as existing owners, particularly smaller owners that are trying to refinance. I think they'll probably get a bit of a scare.

Speaker 1:
We've got what levels not only in terms of cost of debt, but actually availability of debt. So I think on the back of that, um, we'll see a better buying opportunity. And that's another reason why we we've kept our powder tribes and being agnostic, happy to look at all different sectors and and see um and look at the best value possible. It'll be select officers. It'll be the industrial side where we see stronger rental growth that we've talked about before

Speaker 1:
and then select retail. That would probably be more supermarket based as

Speaker 0:
well. If I could just maybe add an aside, um, to to to what we've all said here, I think, um, your questions about focuses on on different sectors. And, um, I think you know, the different answers that we that we've all given to that question, um really sort of summarise in in my mind and and perhaps in all of our minds, um, Given, given all the common commonality between all of these strategies is that we are diversified, Um,

Speaker 0:
is that we very much believe in a diversified strategy as opposed to a sector specific strategy. And I think that you know, the dynamics between the different sectors that we've just described and that we've we've talked about throughout this discussion, Um, really sort of represent that, um,

Speaker 0:
you know, we we see our job as as as value investors in a diversified strategy to be sort of moving nimbly between those sectors sectors at different points in the cycle, Um, as we best see that opportunity. And of course, that's not possible, um, to deliver in a sector specific strategy. So I think that is

Speaker 0:
often a very overlooked point. Um, of of favour, um, towards diversified strategies.

Speaker 0:
Right? Um, and in terms of location, um, are there any, uh, particular cities or geographical areas? Um, that you think are particularly attractive or that you would avoid, uh, potentially, Uh, well, I mean, in in the UK, it's the big six regional cities Birmingham, Manchester, Leeds, Bristol, Edinburgh, Glasgow. Centres of population centres of population growth. Population growth is good for real estate.

Speaker 0:
Um, it increases demand across, um, you know, the the whole real estate universe, Uh, which is then, good for growth and and everything that flows from that,

Speaker 0:
um,

Speaker 0:
but

Speaker 0:
we have a portfolio with properties, you know, 100 and 60 properties from Aberdeen down to Plymouth and from Chester across to Norwich. So, uh, we will look, uh, for for good value opportunities. Uh, and Lord have made the point. I think very, uh, succinctly that the diversified strategies have been overlooked by investors over the last,

Speaker 0:
Um uh, certainly over the last sort of 3 to 5 years, and there will be a large number of investors who got badly burnt by overlooking the benefits of diversification, which, let's face it is another word for risk. mitigation,

Speaker 0:
Uh, by focusing on, you know, single sectors with perhaps not enough, um, background and research to back up when they should get in and when they should get out just blindly following the herd. Uh, and I think that, um,

Speaker 0:
that was a really interesting time for those diversified strategies that have seen much less volatility through the last 24 months than some of the sector specific funds.

Speaker 0:
And Jeff in in Europe. Are there any countries that you don't invest in? Or

Speaker 1:
so our strategy is continental Europe, but mainly sort of Western Europe, and in that really lead by the most liquid markets from an occupational investment point of view

Speaker 1:
where we have the strongest team. So they again that operational influence, that we can create value and relationship management. So that's primarily through France, Germany and the Netherlands, and given them a relatively small vehicle quite happy to focus on those jurisdictions rather than adding, um, say another jurisdiction in in, uh in the Nordic, where we do have a strong team. But I think for now I'm certainly focused on on those key cities in those three countries.

Speaker 0:
If we could move on now to, um, portfolio activity. I was wondering if you could, um, touch on any recent portfolio acquisitions or sales. And what were the drivers of those, um, Richard

Speaker 0:
in terms of sales, um, we've really been focused on special purchases. I don't think this is necessarily a market that you want to be, uh, hanging up the for sale sign outside your properties producing sales brochures circulating around the market. Uh, because we haven't yet. Well, I think it'll change. Got a really committed buying audience.

Speaker 0:
So our, um, sales have been to special purchasers. So owner occupiers, uh, joining owners where we've been able to deliver a off market ahead of valuation results. Um, but for the most part, our focus is on looking in, not out and investing in the portfolio. And Jeff has mentioned it, um, spending, uh, that money we do have on improving the environmental credentials of our buildings.

Speaker 0:
Um, because we think there's a much greater return to be had than try to identify mispriced opportunities in the market.

Speaker 0:
The end?

Speaker 0:
Yeah, I think the the sort of purchase attributes of of, uh, recent activity we've we've touched on, Um, quite a lot already. But But in terms of sales, um,

Speaker 0:
I agree with Richard that the past, uh, 6 to 9 months has not been the time to, uh, to be hanging up with the sale sign. And where we have made sales because we have done some recycling of capital during that time has been to where we've had off market approaches, um, at levels much higher than valuation. Um, or in one case, we sold an asset to a tenant who was looking to take the building and and therefore was seen as a a special purchase and made an attractive offer, Um,

Speaker 0:
sort of going back to, uh, sort of sales, which still feel in my mind fairly recent. But they were made sort of last summer. Um,

Speaker 0:
when the market was was more strongly functioning, we were selling, um, a number of offices. Um, and that was to, um to kind of take some risk off off the table in the office sector, which I think sort of following comments we have made was was for obvious reasons. And I'm I'm glad that we chose to do that, um, and actually made some profitable sales at that time. um, of offices into alternative sectors. So, um, that's really been the driving force there.

Speaker 0:
Great. Thanks. And

Speaker 1:
Jeff? Yeah, we've probably got one asset that we are just finalising some asset management on, and then we'll possibly look at disposing that, um I guess the the attraction at the moment, probably all of us are trading in a bit of a discount from a listed point of view. So the attraction of looking to share buy back with that capital is probably the best use of capital as well or looking at maybe reducing the debt in these current circumstances. So that's something that the board constantly debating, um, and having discussions with with myself around. But it's probably one asset, relatively small asset

Speaker 1:
that we'd be looking at, um, recycling

Speaker 0:
great. Um, and then in terms of other asset management and reinvesting in the portfolio in terms of refurbishment or undertaking lease three years. Is that something that you're particularly focused on at the moment? Is that where you expect, uh, key valuation drivers to come from?

Speaker 0:
I think that's a 365 day year job for all of us. You know that. That's what we do, um, driving income through driving returns through, um, well placed refurbishments bringing buildings up to standard to meet environmental legislation.

Speaker 0:
Uh, but also, and perhaps more importantly, because it delivers a real financial advantage to shareholders investing in the buildings, making them as attractive as they possibly can be to tenants who also have, uh, environmental targets that they want to hit. Um, and I think that one of the things that certainly we've experienced and I don't know if you would agree, is that

Speaker 0:
the, uh, environmental agenda is so firmly enmeshed in our day to day lives that you can't really separate the two anymore. It used to be the case that we had a property strategy and we had an environmental policy that we kept in the draw. Uh, happily, that was a long time ago. And now it's one. And the say that's how you run a property portfolio.

Speaker 0:
Anything to add to that? Yeah. I. I broadly agree. And, um, say that, you know, absolutely. Doing those, um, doing that asset management activity and and keeping on top of a building. Um

Speaker 0:
uh, refurbishment when it's needed is is absolutely our day job. Um, but, um yeah, is is, of course, been a focus during a slightly quieter time in in the investment market. Um, happily, though I think it was the second quarter of this year that we saw one of our busiest quarters for asset management for a very long time. Um and that does definitely, um, continue to drive value at the moment.

Speaker 0:
And

Speaker 1:
it all much the same. Really, Sustainability. Operational excellence is what we're focused on. That's where we see returns going forward rather than financial engineering and really looking at investing in these existing portfolio around that sustainability that I touched on earlier. That's really the focus, I think. The other point, we didn't really talk too much on this, but in terms of the way banks are behaving,

Speaker 1:
and I think they will want to be wanting to align themselves with managers that can derisk the ESG sustainability side. And and I think if you are a manager that can do that, you're gonna put you in a very strong position for refinancing, availability of debt and that cost of debt as well.

Speaker 0:
Yeah, I, I completely agree with that. I think though there is, um

Speaker 0:
I feel and and perhaps with our, um, investors And when talking to the market, perhaps a certain level of of misunderstanding. And and I feel that there's, um perhaps a feeling out there

Speaker 0:
amongst those who are are sort of less less active in the commercial property market that that secondary assets, for example, mean that they must therefore perform less strongly in terms of their ESG credentials. And I would sort of strongly refute that, um, by saying that that we hold a portfolio of, um, sort of mostly secondary assets. Um,

Speaker 0:
yet still find that, um, we have significant opportunity to to to improve their ESG performance. Um, particularly with shorter leases. Again, we have a, uh often often, um, come up against a belief that that doesn't help. Um, but we find that I mean, going through that sort of releasing process, um, whether that's

Speaker 0:
letting to a new tenant or, um uh letting to an existing tenant, um, that that going through that process with dilapidation and and investment in the building that you would do through the course of normal releasing and the fact there's a shorter lease strategy, we're doing that more often anyway, provides us with greater opportunity to get hands on assets to to do improvements.

Speaker 0:
Um, and going back to secondary assets. Actually, what we quite like to do, um, is when we're buying assets. If, um, perhaps on on day one, an asset might not be scoring particularly strongly. Uh, from an ESG perspective, then, um, almost seeing that as an opportunity to to see how how we can improve an asset going forward.

Speaker 0:
Great. Thank you very much. Um, I think just to conclude, maybe if we could go through one by one, if you could all, uh, briefly say what you think is the biggest risk and the biggest opportunity to the commercial property market over the next 12 months, I like to go first. Thank you for that.

Speaker 0:
Uh, the biggest opportunity, uh, is, um, is is the return to the market of all that capital that is poised and waiting to invest. And I do think there's quite a bit, uh, and the opportunity that that capital is pursuing we've all talked about a lot. Is rental growth

Speaker 0:
A And the biggest risk is greater macroeconomic uncertainty. Whether that is precipitated by a worsening of the situation in Ukraine. Um or, uh, an inability of the, uh, current government to get the economy under control. I don't know where it's going to come from, but Macroeconomic, um, uncertainty is the biggest risk.

Speaker 0:
Thanks.

Speaker 0:
Um, I would certainly agree with Richard on the risk. Um, hopefully that's not a cop out. Um, but in terms of opportunity, I would say, um, growing our income base, um, using asset management. I think we're just seeing such momentum in our portfolio in that area. And that sort of really yet to feed through to the bottom line. Um, but that will be coming in in coming quarters of months. And and and I'm really excited to see that coming through. And I think that will be, um, a really positive time.

Speaker 1:
Yeah, It's definitely the the operational sort of influence and expertise that we have as asset managers and working with our tenants. Retaining tenants is quite key

Speaker 1:
and then changing the profile of your buildings as well to make them better, having a stronger relationship with the tenants through the building, and also as an investor and manager as well. So that's what we find exciting. That's how we've geared up our teams to to manage that risk. And that's not only here in the UK, but across the continent as well. And on the risk side, I think it still is this price discovery and I still, with all of these headwinds that we're still trying to price is probably the hardest

Speaker 1:
time in my investment career of trying to price equity. At the moment, you can understand why debt is much, much more attractive, and providing debt is much less risk. But trying to price equity is still very, very difficult. Um, so that's probably still the biggest challenge, particularly for content of Europe. As we touched on the outset. That's probably a little bit behind from a value perspective than where the UK is.

Speaker 0:
Makes sense, Thank you very much that concludes today's panel session. Thank you very much to Richard, Laura and Jeff for joining me today and to you all for watching