10 Jul Commercial property
A common question that we’re currently asked by clients is what the prospects are for commercial property in the future in a post-Covid world? We have all by now, in our ‘new normal’ world, got used to meeting our friends, family, and work colleagues on Zoom or Skype, working from home, and shopping online. High streets and shopping malls were struggling even before the events of 2020 with Debenhams and several middle-market food chains in trouble.
That has led some investors to ask the question as to what the future holds for commercial property. Will everyone work from home? Will companies reduce their office space needs, providing workers with a ‘hot desk’ each morning, if they are in? Will retail companies go into administration to put pressure on landlords to reduce rents? Will more people shop online?
The answer to all of these questions is probably ‘yes’. Does that mean that we should abandon a well-diversified, liquid exposure to global commercial property accessed via real estate investment trusts (REITS), which are listed property companies, focused almost exclusively on generating rental income?
We don’t think so, because…
First, let’s look at the flipside of the changes that are happening. Yes, some sectors may struggle, but for every Debenhams, there will be a company moving into, or even starting up, online, and they will require logistics centres and warehousing. In our digital age, there is increasing demand for secure and up-to-date data centres, improved and more numerous healthcare facilities and out of town warehousing, for example.
Global commercial property REITs cover many things and a typical commercial property REIT could include several property types, such as industrial and offices, holding and development, speciality, residential, retail, and hotel and lodging.
In a globally diversified REIT index fund, there are over 350 individual REITs (listed property companies) each of which is comparable to a property fund in its own right. It’s estimated that such a fund contains around 90,000 properties spread across property types, global markets, and strategies.
Second, let’s spend a moment thinking about markets. The commercial property market is like any other and these worries about the retail sector, for example, have been around for some time and you won’t be the only person thinking about these issues. In fact, thousands, or even millions, of people will already have done so and acted on their view of the future of property, by buying and selling these REITs in the market. The aggregate view will be reflected in today’s REIT prices: all the doom, gloom and uncertainty is priced into the process of REITs already; all the likelihood that the way we work and live our lives is priced in already; and all the good news about data centres and warehousing is priced in already. So, the future prospects for commercial property will depend on what happens relative to this expectation. It might be better or worse, depending on information we don’t yet know. The release of that information is random. What we do know is that commercial property will continue to be needed and that companies will have to pay rent. We wouldn’t abandon owning a diversified equity portfolio because some sectors are struggling (airlines and energy) or concentrate our portfolio in sectors that are booming (technology). It’s already in the price, companies and sectors will continue to move up and down.
Third, let’s think about why we hold commercial property in portfolios in the first place. Property tends to have a different return experience to equities (even though property companies are listed on stock markets). At specific times, and across time, this can provide diversification to a portfolio. In addition, over time property has provided protection from inflation; after all, a property is a property and many rental agreements are linked to some measure of inflation. With the rapid increase in the money supply, on account of all the government support packages around the world, higher inflation, not something most feel the need to worry about currently, is one future scenario.
So the answer is to stick with your allocation to property as the reasons it was originally included haven’t changed. A small allocation to global commercial property still makes sense for long-term investors, as part of their diversified growth assets.
This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person. Your capital is at risk when investing.