- Covid-19 has accelerated existing trends in commercial property – agile working, online shopping, digital transformation.
- Companies are likely to have a keen eye on affordability and functionality in the years ahead.
- Diversification has proved an important tool to manage the impact to our shareholders.
The Covid-19 outbreak has brought significant disruption and hardship for many industries and commercial property landlords have had to adapt. In the short-term, they have had to deal with tenants’ cash flow limitations sensitively, but they have also had to look at their portfolio of properties and judge whether it is appropriate for a changing world.
None of this is entirely new. Commercial property landlords have long had to deal with significant structural change, from the seismic shifts in retail, to the growth of industrial warehousing. Covid-19 has, for the most part, merely accelerated existing trends – agile working, online shopping, digital transformation. Nevertheless, we believe certain practices have become more important in the wake of the Covid crisis.
Being on the right side of structural change
Covid-19 has not, by and large, changed the direction of travel in many industries. Retail was already moving away from the high street and towards online shopping. Agile working was becoming more prevalent long before the pandemic forced us to stay at home. Nevertheless, the crisis has given these trends a new urgency.
We took the decision five years ago to divest of much of our retail exposure, moving instead to industrial holdings. Today, we need to assess how the office market will change. Will the office become obsolete? Certainly, it is likely to see significant change. The way people get to work will change with cycling and walking set to increase, at the expense of the train or tube. Proximity to affordable housing is likely to be of increasing importance, although a wholesale move to out of town offices remains unlikely It is clear that many employees are not ready for a wholesale return to the office, but we do not believe the office is dead. Employees have not yet lived through a gloomy winter confined to their homes and there are limits to the amount of creativity and collaboration that is achieved through Zoom. Younger people benefit from an office environment to learn and develop. Our view is that companies will seek to achieve a greater balance. Tomorrow’s agile working may include working two or three days a week from home or different office hours. This will necessitate a different type of work space.
As we see it, town centres will generally still outperform as they offer better connectivity and amenities. Increasingly, technology will impact the whole experience, with interactive apps guiding the decision to go to the office, providing touchless access around the office, helping with desk allocation and meeting room booking.
Ensuring affordability and value for money
The days of high rents and optimistic capital values are behind us. Instead, tenants want good quality properties in good locations, rather than prime properties in the most glamorous locations. We have an office in Birmingham, for example, which is 5-10 minutes from the city centre. It has all the right amenities – public transport links, parking, food retail – but the rent is at a significant discount to property in the centre of town. We have a similar property in Edinburgh, which is close to the university and the technology sector. It is notably cheaper than central Edinburgh properties. Companies are likely to have a keen eye on affordability in the years ahead.
Environment, social and governance considerations are at the heart of the fund. It is no longer an add on or optional activity. Through simple activities, we can make a real difference. The first area is in energy performance. If we provide energy efficient buildings, we not only reduce the carbon load, but we also reduce operating costs for occupiers.
The second area is in the social or wellness area. Here there is a huge benefit to productivity and individual wellbeing if the work environment has good quality air, natural light, comfortable temperatures, great showers and changing facilities, even add-ons such as yoga studios. We want to form a sense of community in a building. As a landlord, we benefit from greater levels of occupation and more sustainable income if we provide places people want to work and are productive. Increasingly just “doing” ESG is not enough, and we need to have a governance framework that measures and verifies what we say. This is increasingly important to occupiers who want to demonstrate to their staff and customers the responsible approach they are taking.
Building strong and transparent relationships with tenants
We have a huge variety of tenants, from sole traders to multi-national corporations. Some have experienced real distress through this period and we have sought to be sympathetic to their changed circumstances. This has meant keeping in regular contact and working out terms that allow them to rebuild their businesses through this difficult time.
This has necessitated some flexibility, but in most cases we have seen that flexibility pay off. Two retail tenants agreed a rent-free period but signed up for a 15-year lease in return. We believe they will be around for the long-term and as we value consistency of tenure, we felt this was a win-win situation. The key has been to know and understand our tenants’ businesses. We have a broad network of asset managers across the UK and their feedback has been invaluable.
There are times when diversification can feel painful. For example, we considered our leisure holdings to be an important diversifier for the Trust, but areas such as hotels and gyms have been a tough spot during the crisis. However, this crisis has hit in unexpected ways; the next crisis (and there is always likely to be another crisis) will be different. We believe diversification is an important tool to manage the impact to our shareholders.
We believe that a combination of all these factors has helped steady the ship at a tough time for commercial property. They are likely to be even more important in the world that emerges from the Covid pandemic.
Investments in real estate securities may involve greater risk and volatility including greater exposure to economic downturns and changes in real estate values, rents, property taxes, interest rates, tax and other laws. A REIT’s share price may decline because of adverse developments affecting the real estate industry.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and currency exchange rate, political and economic risks. Fluctuations in currency exchange rates may impact a fund’s returns more greatly to the extent the fund does not hedge currency exposure or hedging techniques are unsuccessful. These risks are enhanced in emerging markets countries.
Equity securities of micro-, small and mid-cap companies carry greater risk, and more volatility than equity securities of larger, more established companies.
Commentary contained within this document is for informational purposes only, and is not intended as an offer or recommendation with respect to the purchase or sale of any security, option, future or other derivatives in such securities. Some of the information in this document may contain projections or other forward-looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/ her own assessment of the relevance, accuracy and adequacy of the information contained in this document, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment.
The above is for informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments mentioned herein. Aberdeen Standard Investments (ASI) does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials.
Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither ASI nor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.