Property Latest opportunities in property markets - Guy Glover, Peter Lowe Jason Anderson - BMO Global Asset ...
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771137 – UK For professional Classification: investors only to be shown if not only public Property Latest opportunities in property markets Guy Glover, Peter Lowe Jason Anderson
Investment risks Classification: only to be shown if not public The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. The value of directly-held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment. 2
Today’s agenda Classification: only to be shown if not public • 2019 – Market review • Property – Offering income in a low return environment • Amazon versus the rest – What next? Agenda • Brexit in four simple charts • Responsible property – A different approach • Opportunities for 2020 • Questions 3
2019 – Property: a tough but balanced scrum Classification: only to be shown if not public Historic low bond yields GDP forecasts Risk premium Political Low vacancy uncertainty Occupier demand Retail malaise Controlled development Absolute Lower pricing leverage 4
Sheds and beds, together with regional offices lead the way Classification: only to be shown if not public South East industrials have been the strongest performer, delivering 11.2% over the year. Alternatives and Rest of UK offices also performed well, delivering 6.3% and 6.4% respectively. 15% 10% 5% 0% -5% -10% -15% -20% Standard Standard Shopping Retail Office - City Office - West Office - Rest Office - Rest Industrial - Industrial - Other All Property Retail - South Retail - Rest of Centre Warehouse End & Mid of South East of UK South East Rest of UK Types East UK Town Income Return Market Value Rental Growth Equivalent Yield Impact Total Returns Past performance should not be seen as an indication of future performance. Source: MSCI UK Monthly Property Digest June 2019 5
Property continues to offer an attractive income premium over fixed interest and gilts Classification: only to be shown if not public Income return January 2000 – June 2019 9 8 7 6 5 5.2 % 4.3 4 3 2.2 2 1 0.75 0 0.45 Jan 00 Jun 02 Nov 04 Apr 07 Sep 09 Feb 12 Jul 14 Dec 16 May 19 MSCI UK Monthly Property Index UK base rates 10 year gilts BAML Sterling Non-Gilt Index FTSE 100 Income Return Past performance should not be seen as an indication of future performance. Source: MSCI UK Property Index, Datastream as at 30-Jun-19. 10 year gilt as at 16-Aug-19. FTSE International Limited (“FTSE”) © FTSE 2019. 7
Importance of income as a counter to volatility Classification: only to be shown if not public The contractually backed, relatively stable and consistently positive income return underpins property performance 12 month All-Property Income Returns and Total Returns (%) 25 Income 76% 20 15 % 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Income Return Total Return Past performance should not be seen as an indication of future performance. Source: MSCI UK Quarterly Property Index for Standing Investments June 2019 8
Sustainable locations Classification: only to be shown if not public Staines-upon -Thames Luton Balham • Multi-let estate comprising two • Lease to Homebase until Dec 2020 • Long lease to Sainsbury’s with 14 industrial units years unexpired • Homebase to remain in 24,000 sq ft • Tenant in Unit B not in occupation at an improved rent • Five yearly rent reviews with RPI linkage, compounded annually • Surrender agreed to facilitate a new • New foodstore and drive-thru being letting to Hire Station Ltd at a new developed on remainder of site • Future residential development site rent 30% higher than the previous passing rent. Source: BMO Real Estate Partner as at September 2019 9
Retail sales are positive but online market share continues to grow Classification: only to be shown if not public The historic relationship between retail sales and retail rental growth has faltered. Online penetration, particularly for non food, and rising input and occupancy costs are all factors. Annual Retail Sales & Retail Rental Decline to 2019 (%) Growing share of online sales (%) 10.0 40 8.0 35 6.0 30 4.0 25 2.0 20 0.0 15 -2.0 10 -4.0 5 -6.0 0 -8.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total Retail Sales Non Food Sales Annual Retail Sales Annual Retail Rental Growth Source: ONS as at August 2019, MSCI UK Monthly Property Index, PMA, DRSI Source: Property Market Analysis (PMA) June 2019 11
So what’s the impact…? Classification: only to be shown if not public Bricks and mortar retail is facing challenges from multiple factors, and there is a scarcity of new retailers entering the market. Whilst we do not believe that in-store retailing is dead, the rulebook has been ripped up on traditional retail. • • Bricks and mortar retail will • Significant rental declines Growth of online shopping • Even in stronger locations to continue still play an important part in poorer, oversupplied rent models in retail assets of retailers’ strategies, locations • Retailers have to adapt to are coming under scrutiny. supporting omni-channel • Shopping centres an omni-channel model retailing • Could turnover rents particularly suffering from a become the new norm? • Stores become showrooms ‘contagion’ effect and collection points as well as retailing locations Source: BMO REP September 2019 12
But it’s not all bad news! Classification: only to be shown if not public The retail vacancy rate across the house portfolio is just 1.7% Winchester High Street Edinburgh, Princes Street Rayleigh, 55 High Street • Lease to Vodafone expiring in • 15,400 sq ft high street unit arranged • Lease to Cath Kidston expired April 2021 over 4 storeys May 2019 • Vodafone put lease on market • Relet on a 10 year lease to Savers • Cath Kidston vacated Health & Beauty • New 10-year lease to Seasalt • Two parties bidding for a new lease at higher rent • New rent 7% ahead of valuation and agreed at a higher rent sets strong comparable evidence for • Only two weeks’ void incurred the Fund’s holdings in Rayleigh (x2 outstanding rent reviews) Source: BMO REP September 2019 13
Brexit
Brexit – in four simple charts Classification: only to be shown if not public Net investment volumes (£m) Central London Office take-up (sq ft) 25,000 14,000,000 20,000 12,000,000 10,000,000 15,000 City take up 8,000,000 10,000 6,000,000 ~ 4,000,000 1m sq ft in 5,000 2,000,000 July 0 0 2015 2016 2017 2018 2019 YTD Overseas Domestic Long-Run Average City West End Industrial 12 month total returns (%) Construction cost index (100 = Jan 2010) 25.0 125 120 20.0 115 15.0 110 105 10.0 100 5.0 95 2014 Aug 2015 Aug 2016 Aug 2017 Aug 2018 Aug 2015 Feb 2016 Feb 2016 May 2017 Feb 2018 Feb 2019 Feb 2014 May 2014 Nov 2015 May 2015 Nov 2016 Nov 2017 May 2017 Nov 2018 May 2018 Nov 2019 May 0.0 2016 2017 2018 2019 Source: Property Data July 2919, Savills August 2019, MSCI Monthly Index August 2019, ONS August 2019 15
Our leading ESG approach
Responsible Property Investment (RPI) – a comprehensive approach Classification: only to be shown if not public ✓ 100% renewable energy ✓ Green lease clauses ✓ GRESB participant – 40% increase in score- green stars awarded ✓ Intensity-based energy, water and waste reduction targets ✓ Sustainability reports acquired on acquisition ✓ Annual RPI reports produced – EPRA Gold Award in 2019 for quality of reports ✓ ISO14001 Environmental Management accreditation across all managed assets ✓ Living Wage accreditation – BMO UK Property Fund EPC = Energy Performance Certificate; GRESB = Global Real Estate Sustainability Benchmark Property interventions constantly monitored 17
A spotlight on Royal Standard Place, Nottingham Classification: only to be shown if not public Owning property assets directly allows for physical interventions to improve the environmental and social impact of our buildings • £2.2m comprehensive refurbishment incorporating significant sustainability improvements including: ✓ High efficiency heating and cooling design for reduced energy consumption ✓ Roof-mounted solar panel system generating c.4,000 kWh of renewable energy p.a. ✓ Occupancy sensing lighting and water controls to reduce unnecessary usage ✓ Installation of three Electric Vehicle charging points £2.2m refurbishment ✓ New cycle storage, shower and changing room facilities Source: BMO REP September 2019 18
Residential Responsible Investment Classification: only to be shown if not public The BMO UK Housing Fund has been designed to impact the UK housing shortfall by attracting long-term institutional investment through the delivery of flexible build to rent stock nationwide. It aims to: • Create a mid priced long-term rental product targeting the mass market and incorporating affordable private rent • Deliver a solution for an under provided segment of the residential market focused on low to middle income families such as key workers • Build sustainable homes underpinned by sustainable communities • Utilise an ESG approach that goes beyond traditional environmental concerns and supports the Fund’s investment objects by protecting income and improving the resilience of schemes • Work with partners to achieve our joint social missions Creating a sustainable and defensive income stream from a growth sector 19
Opportunities for 2020
Lower for longer Classification: only to be shown if not public With global bond yields set to remain ‘lower for longer’, property returns could be boosted due to the strong inverse relationship between returns and the lagged yield gap UK All Property Returns (% pa) 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Main scenario Main Growth Lower Bond Yields Lower Growth & Lower Bond Yields Past performance should not be seen as an indication of future performance. Source: PMA Summer Scenario 2019 21
Sectors for opportunity Classification: only to be shown if not public BMO REP Forecast Total Returns by Segment 5 years to 2023 - per cent per annum South Eastern offices 6.0 West End offices 5.3 Distribution 5.2 Rest of UK offices 5.2 City offices 5.2 Standard industrial 5.0 Alternatives 4.7 All Property 3.6 Retail warehouses 2.0 Standard retail 1.4 Shopping centres -1.6 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Estimates and forecasts are provided for illustrative purposes only. They are not a guarantee of future performance and should not be relied upon for any investment decisions. Estimates are based on assumptions and subject to change without notice. This is a projection for information purposes only and is not guaranteed. Source: BMO REP July 2019 22
Positioned to perform Classification: only to be shown if not public Bury St Edmunds Leeds Basingstoke • Long-let hotel leased to • Multi-let regional office building • Single-let well-specified Travelodge for 20 years situated in the heart of Leeds CBD distribution asset located in Basingstoke, with close links to • Drive-thru Starbucks on site • One small suite to let – some the M3 leased for 25 years competition from serviced offices • Let on a 10 year lease to Bunzl • Both leases provide for 5-yearly • ‘Plug and play’ fit-out provided to UK Ltd at c.£9 psf fixed uplifts linked to RPI appeal to smaller occupiers • Potential to capture rental growth • Yielding 5%+ with inflation- • Suite now let at £33 psf, compared at rent review linkage to an ERV of £26 psf Source: BMO REP September 2019 23
Today’s agenda Classification: only to be shown if not public • No exuberance in values since 2016 – Brexit has dampened the cycle • Retail is severely challenged UK Property – risks and • Asset management can preserve or add value opportunities • Industrial is the star performer but caution on over exuberance • Income dominates future positive return 24
Appendix
Friars Square Shopping Centre – A Cautionary Tale Classification: only to be shown if not public Friars Square leasing Plan as at 2015 Friars Square leasing Plan as at 2019 Porcelland Dead Universe Comics SW1 Barbers Supercuts Barbers Supercuts SW1 16A/17A Noodle 16A/17A Noodle Nation Nation 12 13 8/10 12 13 8/10 New Look New Look Next Next Superdrug Superdrug Blue Inc. Office Clarks Office H&M 1A H&M 1A Wenzels Clintons Claire’s Smiggle Clintons Claire’s 20 16/17 20 16/17 1B Caffé Nero 1B Caffé Nero River Island River Island 21 12A/15 7 5/6 4 2/3 1 1C Mr Simms Olde 21 12A/15 7 5/6 4 4A 2/3 1 1C Eurochange Sweete Shoppe 39 40 41 42 43 44 22 44 45 46 Shoe Zone 22 K4 P1 38 39/40 41 42 43 K4 P1 38 Vision Express Ernest Jones Warren James H. Samuel Holland & Barrett 2723/24 2723/24 H. Samuel Thortons Pandora Holland & Barrett Ernest Jones 45/46 Pandora Surelock Holmes Shoe Surelock Holmes EE TopShop To Let EE TopShop 37 37 Metro Dead Universe Comics 25A 25 O2 Zone Pumping Iron 25A 25 TOPMAN O2 Bank K1 K1 36 36 K5 K5 K6 3 store K6 3 store K3 K2 K3 K2 Peter’s 26 Trespass 27 35 To Let 26 Trespass 27 34&35 LG HaIrdressers 28 28 The Entertainer Roman Originals 34 Perry’s Aylesbury Cards Direct The Gym Group 33 33 29 Pink Squirrel Roman 29 To Let 31/32 31/32 Burton Waterstones Waterstones Dorothy Perkins To Let STORE B STORE A STORE B STORE A BHS House of Fraser House of Fraser Wallis To Let Amazon Lockers Source: Friars Square 26
Disclaimer Classification: only to be shown if not public Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned. This document: • has been issued and approved by, and is the sole responsibility of, BMO REP Asset Management plc of 7 Seymour Street, London W1H 7JW (“BMO REP”) which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (registration no. 119283). • is for professional investors/advisers only and the information in it may not be appropriate for all persons in all jurisdictions in the world. By accepting this document, you represent and warrant that you are an appropriate person to receive such information. • should not be considered as nor constitute as any investment, tax, legal or other advice and you should obtain specific professional advice before making any investment decision. Nor is it an offer or solicitation to deal in any of the investments or funds mentioned in it, by anyone in any jurisdiction in which such offer or solicitation would be unlawful or in which the person making such an offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. • contains confidential information belonging to BMO REP and/or third parties and is supplied to you solely for your information and may not be forwarded to any other person, reproduced or published in whole or in part for any purpose. No representation or warranty, express or implied, is given by BMO REP, or any other person as to the accuracy or completeness of the information or opinions contained in this document. Save in the case of fraud, no liability is accepted for loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information or opinion contained in this document. © 2019 BMO Real Estate Partners LLP. Registered in England and Wales with number OC338377. Registered Office: 7 Seymour Street, London W1H 7JW. BMO REP Asset Management plc is a subsidiary of BMO Real Estate Partners LLP and are members of the BMO Financial Group, which is itself wholly-owned by the Bank of Montreal. FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. The BMO UK Housing Fund mentioned is the BMO UK Residential Real Estate FCP-RAIF, a reserved alternative investment fund in the form of a common investment fund. 27
Contact us Classification: only to be shown if not public BMO Global Asset Management (EMEA) – Head Office BMO Global Asset Management – Edinburgh Exchange House 6th Floor, Quartermile4, Primrose Street 7a Nightingale Way, London EC2A 2NY Edinburgh EH3 9EG Tel: +44 (0) 20 7628 8000 Tel: +46 (0) 207 628 8000 bmogam.com Extensive worldwide investment capabilities • Total focus on clients • Comprehensive range of products and solutions • Defined expertise – including a suite of specialist investment boutiques ©2019 BMO Global Asset Management. Financial promotions are issued for marketing and information purposes; in the United Kingdom by BMO Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EU by BMO Asset Management Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by BMO Global Asset Management (Swiss) GmbH, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).
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