First published in Family Capital.
It may surprise you to learn that the historic city of Siena, in Italy, population 30,000, covers the same area as a road junction in Texas, population zero. How much does each contribute to GDP? How much is each worth? What would you pay as an investor to own the real estate behind each?
Do these questions matter? Well, the answers get to the heart of the big question of how innovations shape the way we use space. And the changing ways we will use it in the years ahead is a big question on investor’s minds as they grapple with the idea of allocating money to real estate.
Property investors in the UK were having a hard time even before the Covid-19 crisis hit. Retail bankruptcies in the UK had hit more than 400 companies and over 19,000 stores over the last decade, putting real pressure on rents and values. Then came Covid which has ushered in a spate of company voluntary agreements and further store closures including Byron Burger, Pret a Manger, Debenhams and even some John Lewis stores.
Travelodge is fresh from an acrimonious battle with landlords over £140 million in rent cuts. Rents linked to tenants’ turnover levels have been suggested as a solution, but this may not be appealing to traditional investors. Office space in city centres is no longer at a premium.
Most property funds remain frozen at the time of writing under “material valuation uncertainty” clauses, but investors are beginning to plan ahead as some are set to start re-opening soon.
The classic three pillars of property assets (retail premises, office space, and industrial units) are now under severe pressure, but where else can investors turn?
One approach could be to go global. Global property funds typically run on a theme of investing in a range of cities globally that gives diversification. Different dynamics are likely to be at play in Melbourne compared to Boise or Berlin say. But some might even question the future of cities.
Another option is to look at the economics and switch the emphasis to investing in infrastructure. Long-term private markets funds that invest in infrastructure assets from toll roads to ports and renewable energy have emerged in recent years with more aligned fee terms for investors than the funds of yesteryear. The switch to a green economy could be an important theme here.
Other niches closer to the UK could also be considered. UK residential property was emerging as a legitimate asset class prior to the pandemic and with a “building back” agenda demand looks set to stay strong. Indeed many commercial property funds are looking into converting commercial premises to residential.
This could cover social housing, often these are pseudo-government housing associations leasing properties on long-term leases to house asylum seekers or those requiring assisted living. This potentially offers investors a stable income over the long term from their tenants.
The intriguing space comparison between Siena and Texas noted above was put forward in a 2020 UK government commission report, “Living with Beauty” that proposed a new planning and development framework centred on beauty and stewardship.
Real estate has been a staple component of investor’s portfolios for decades, some would say centuries, and surely will be again.
But 2020 has sharply accelerated some trends which may be causing a generational redefinition of where value lies in real estate, which could be painful for investors, and may signal the end of traditional allocation between retail, commercial/ and industrial sectors. As well as residential space, they could include data centres and logistics hubs, drawing on the wider universe of real assets such as infrastructure.
As always investors must think long-term and approach the world as it is, not as they would like it to be.