Managers of the £480m Schroders Real Estate investment trust are backing industrial property over prime London offices to beat a slowdown in that market.
The view is that a “cyclical slowdown” is happening in the central London office market and declining consumer confidence is hurting the retail market, but industrial property that benefits from the rise of e-commerce is where the opportunities lie.
The trust gained 1.58 per cent in the six months to 30 September, compared to a return for the average fund in the AIC Property Direct sector of 4.4 per cent, according to data from FE.
In the commentary accompanying the trust’s half year results, Lorraine Baldry, chair of the trust said: “Investor and occupier demand for the UK commercial real estate market has remained relatively stable since the EU Referendum result in June 2016.
"There are, however, cyclical risks and other factors which will lead to a widening divergence in performance between different types of real estate.
"This is best illustrated by the structural changes arising from rapid growth of on-line retail which is driving strong rental growth in the industrial and distribution sectors, whilst reducing the overall demand for retail property.”
Duncan Owen, global head of real estate, Schroders, said the industrial sector as a whole delivered a return to shareholders of 8.9 per cent in the six months under consideration, while the London office and UK retail sectors both returns less than 4 per cent.
He said: “The [industrial] sector is benefiting from strong demand driven by the rapid growth of e-commerce.
"Parcel delivery companies and traditional retailers are re-engineering supply chains to service on-line orders in increasingly shorter timeframes.
"Industrial rental increases are also supported by low supply and rising construction costs, particularly for smaller multi-let estates.
"There are limited levels of new development. For example, the total amount of industrial space in London has fallen by 14 per cent over the last decade with the North West and West Midlands regions also experiencing 10 per cent and 8 per cent declines respectively.”
Mr Owen said the number of vacant offices in the City of London financial district and the Docklands area has been increasing.
Of the retail sector, he said: “The sector continues to face headwinds from a slowdown in consumer spending exacerbated by higher inflation, the shift towards on-line and the squeeze on retailer’s margins due to sterling weakness and the increase in the living wage.”
The Schroders Real Estate investment trust has a yield of 4 per cent and trades at a discount to net assets of 6.1 per cent.
David.Thorpe@ft.com
