Oct. 6, 2020
This article originally appeared in CoStar on Tuesday 6th October 2020, written by IPSX Managing Director and Head of Capital Markets, Roger Clarke.
Covid-19 has struck at the heart of the UK real estate sector by sending the industry into lockdown and emptying out large swathes of shops, offices, hotels, pubs and restaurants. But there are some reasons to be optimistic, not least because the catalyst for innovation is often dramatic change as big problems call for new solutions.
Last week M7 announced its intention to float Mailbox REIT on IPSX as the first company to list on IPSX, which we see as a way to democratise property for private investors and to give institutions a whole new way to invest in single real estate assets.
Now the real estate world has a chance to examine itself we can see some clear drivers that will be with us for the next few years and will dominate the real estate sector. Here are our thoughts on these trends and how IPSX can help support and provide new solutions at this most challenging time for investors and asset owners.
Interest rates will be lower for longer - in a low interest rate environment, UK property yields will remain attractive at about 500bps above the 5-year Sterling swap rate. In June, the Investment Property Forum forecast that despite capital returns turning negative in 2020, income return in property will be 4.3% this year, rising to about 5% per year over the next four years. By comparison, AJ Bell forecast a FTSE 100 yield of 3.6% for 2020 – a considerable downgrade from the 4.7% it predicted at the start of the year. It remarked that, despite those lower expectations, the FTSE 100 index is still a relatively attractive investment option for income-seekers in this economic environment. What some funds might miss is that property is an even more attractive option, offering a better income return amid a widespread slowdown as interest rates remain low.
Greater transparency for investors - we have seen values for different asset classes impacted by the ability of tenants to pay rent at varying levels. Values of logistics have held up, driven by the continued increase of online shopping as have assets with long leases, let on good covenants. Unsurprisingly, retail and leisure have seen the greatest decreases in value. Values will inevitably rise and fall in times of heightened volatility, and that will often be out of our control, whether we are fund managers, heads of listed firms or investors. The challenge is to meet that volatility with as much clarity on asset values as possible. For investors, having transparency to the performance of the asset is key, whether that be through regular valuation reports or being well sighted on the lease holders and how well rent payments are holding up.
Greater flexibility for corporates - business occupiers are responding to COVID by drawing up plans for a more flexible approach to their location and space utilisation. This is impacting on regional values as we see greater demand for flexible space outside city centres. The trend that we have seen from major corporate occupiers to free up capital and sell assets using sale and leaseback will continue as they seek to respond to ongoing shifting demands. The downside to these transactions is that occupiers can find themselves with a reduced asset base, ever-rising rents and alterations clauses that can restrict their business – something we have seen time and again over the last several decades.
Onshore versus offshore - progress on the promotion of onshore structures is both welcome and long overdue. In March, the Investment Association and the Association of Real Estate Funds called on the government to create a professional investor fund structure, which would act as an onshore alternative to fund managers setting up in offshore jurisdictions. The statements from the IA and AREF have been encouraging, and the OECD’s framework around base erosion and profit shifting (BEPS), published last year, has done its part in making it increasingly inefficient to be offshore. At last, tax avoidance is being met with concerted action from an industry, national and international level. These conversations have been a long time coming, but we recognise that we need to continue to act as an industry to ensure that alternatives are not just proposed, they are fully implemented.
Environmental, social and governance (ESG) is back on the agenda - factors are being increasingly recognised within the investment management industry as material to both management performance potential and investor demand. While sustainability plummeted to the bottom of the in-tray after the Global Financial Crisis in 2008, Environmental, Social and Governance issues have stayed front of mind in 2020, partly due to the rise in importance of social value in the real estate world.
More protection for investors - investors need better protection and under proposed rules waiting will become the norm for investors who now face a six-month delay if they choose to exit open-ended funds. The FCA’s consultation paper was met with concerns about how open-ended property funds can survive given the added complications these rules would introduce. But investors should not have to risk their own interests for the chance to invest in UK commercial real estate. Public markets are an alternative to open-ended funds, giving investors real time price discovery and the option to buy and sell property indirectly through shares.
At IPSX, the new stock exchange for real estate assets, we are well placed to capitalise on all these trends. Single listed real assets will be transparent, delivering a strong yield performance compared with equities and bonds, allowing full scrutiny of ESG performance and above all, providing a much needed innovative alternative new source of income for property owners across both the public and private sectors.
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