The importance of careful stock selection and an acknowledgement of the polarisation of retail locations will be important in 2020.
Property demand
Valuations in industrial and logistics have continued to rise or hold. As retailers have shrunk the size of their shop portfolios so they have increased their logistics network to support online transactions.
There has been great interest in both ‘big box’ logistics and ‘last-mile’ logistics among occupiers and investors alike.
Limited speculative development has supported rental growth and sustained valuations.
Into 2020 there may be a greater risk of over-supply in ‘big box’ space, which could curtail rental growth, while there still appears headroom for rental growth in smaller format ‘last mile logistics’ warehouses.
Demand for central London offices has been inextricably linked with the fortunes of Brexit but investment demand has been maintained by overseas investors who have enjoyed currency arbitrage and for whom Brexit has been a sideshow.
The election result is forecast to be positive for London offices in 2020.
Demand for regional offices coupled with low levels of development has led to rents in major regional cities hitting new headline peaks.
Notwithstanding the economic and political headwinds, 2019 recorded 32.8 million people in employment in the UK, which is a strong indicator of demand for office space, so we go into 2020 with a reasonable tailwind.
2020 promises to be a more active year for real estate after 2019 saw over 20 per cent plus lower volumes than 2018.
Capital targeting real estate, conditional on greater economic certainty is likely to mobilise.
The question is, how should investors access the real estate market?
Which fund?
Approximately two thirds of investment into commercial real estate funds sits in open-ended funds.
These funds promise daily liquidity and low volatility as investors hold units in the underlying net asset value of the fund.
The attraction of open-ended funds is the promise of liquidity, regular distributions and the low correlation to equities offered by real estate.
But liquidity comes at a price, and that price is income.
Typical open-ended fund distributions are 2-3 per cent pa against income returns from the real estate of 5.75-6 per cent.
Furthermore, liquidity is often only available in periods of net inflows.
When the funds start to experience net outflows, the manager can move from ‘bid pricing’ to ‘offer pricing’, which can instantly take 5 per cent plus off the value of the units.
In times of extreme liquidity pressure the manager can go further and suspend the fund.
While suspended, good assets may be sold and the value of the units might fall significantly.
