Investment funds reduce exposure to high street property

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Bricks and mortar on the high street has seen a massive shift by UK property funds as they drastically cut their exposure when the Covid-19 pandemic took hold. Lock-down closures and the shift to on-line sales and deliveries have taken their toll on retail rental incomes and rapidly falling asset values.

Property fund managers with direct investments in retail stores have had to renegotiate rents downwards to help tenants survive, while at the same time accelerating their divestment strategy, moving away from the sector, which was already facing long-term decline, even before Covid hit.

According to the FT, there is an estimated £6.4bn of rent arrears in the UK retail sector, and with a ban on commercial property evictions now in place until March next year, much of the arrears is unlikely to be recovered.

According to investment consultants and fund managers FE fundinfo, UK Direct Property has reduced their exposure to retail property during 2021, with average allocation now at 5.9%, down from almost 9% in January 2021.

The £1.2bn AUM M&G Property Portfolio has reduced its exposure from from 38.4% to 29.1% as fund manager Justin Upton explains:

“With retail sales exchanged and currently in solicitors’ hands this is due to reduce even further to around 21% in line with the fund’s strategy.

“We have made strategic sales, which have focused on asset risk such as age/location/sustainability and where we had tenant concerns such as covenant strength, lease length or vacancy.

“These sales have subsequently resulted in our vacancy levels falling to 7.7% as of June 2021 – well below the peer average of 12.9%. Our average lease length has also extended to 7.7 years.”

Similarly, head of UK property at Canada Life Asset Management (CLAM) Michael White said the firm’s retail exposure has fallen through “valuation reduction”, and it has “accelerated the strategy to reduce high street exposure where we are able to do so”.

Arrangements for paying off rental debts have largely been left to tenants and landlords, and in some cases has led to bitter legal disputes.

White explained CLAM has been active in this respect by “negotiating lease re-gears, rent concessions and deferrals on a case-by-case basis”.

He added that while this “has proven to be successful”, there remain “certain parties who still refuse to discuss arrears”.

M&G’s Upton also reported “constant dialogue” with tenants over the last 18 months, negotiating “a variety of payment plans” ranging from deferment packages to rent free packages in exchange for longer terms and lease extensions.

The result of this has been M&G Property Portfolio collecting “more than 90%” of both rental income and service charges for 2020, according to Upton, with the fund delivering an income distribution of 4.7%.

Coronavirus has caused significant disruption for bricks and mortar retail, but the sector also faces the longer-term existential threat posed by the boom in online retail.

As a result, property funds managers have been actively reallocating capital away from bricks and mortar retail to online competitors, with assets like warehouses becoming an increasingly attractive investment.

Fund manager and co-head of institutional UK real estate at Columbia Threadneedle James Coke explained in March: “Within the MSCI UK Property Monthly index, net disinvestment from retail has totalled £3.6bn over the past five years, averaging £60m a month.

“As sales proceeds are redeployed into the industrial sector, its market share – and hence performance contribution – has increased, to the extent it now accounts for 37.3% of the index.”

He said “the migration of retail online”, which been accelerated by the pandemic, has “dramatically impacted many town centres but left a nationwide shortage of logistics space, leading to sustained increases in industrial rents and corresponding compression of yields in that sector as investors have piled-in to an asset class considered a safe haven”.

White said CLAM still favours “the out of town retail format”, but that “essential retail”, such as food and DIY, “remains a viable sector” for the fund.

He goes on: “the migration of retail online”, which been accelerated by the pandemic, has “dramatically impacted many town centres but left a nationwide shortage of logistics space, leading to sustained increases in industrial rents and corresponding compression of yields in that sector as investors have piled-in to an asset class considered a safe haven”.

While high street fashion continues to suffer, with the challenge of of online shopping and a current consumer spend aimed at experiences, such as restaurants and entertainment, fund managers are not giving up on the “out of town retail format” and they still favour “essential retail”, such as food and DIY, which remain “a viable sector” for these funds.

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Fraudster who invested cash in property portfolio faces Proceeds of Crime confiscation hearing

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A conman who police believe used his ill-gotten gains to invest in a property portfolio faces having the homes confiscated via a Proceeds of Crime Act (POCA) court hearing.

Mark McCracken was convicted in 2019 of several high-value scams including masterminding a £600,000 ‘cash for crash’ insurance fraud scheme.

Faced with overwhelming evidence, at the time he pleaded guilty to 11 counts of money laundering and perverting the course of justice.

Prior to the this, when police raided properties linked to him, some £77,000 in cash was found along with evidence at his home within a secret cupboard that he had created fake identities.

To recover his proceeds of crime, McCracken now faces a three-day hearing during which police will highlight the scale of his frauds and its intention to use powers under the POCA to seize the properties.

Property portfolio

These are believed to be in Wigton, Cockermouth, Maryport and Carlisle.

A spokesperson from Cumbria Police told LandlordZONE that it would be able to reveal whether the properties had been rented out once proceedings against McCracken are concluded, mostly likely in early December.

McCracken is expected to contest the attempt to confiscate his assets, local media reports.

POCA sets out the law in relation to the recovery of criminal assets with confiscation being the most commonly-used power.
This normally only occurs after a conviction has taken place and is designed to prevent criminals benefitting from their crimes and to act as a deterrent.

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BREAKING: Leading property firms back ‘trackable’ EPC passports scheme

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A group of 14 leading property organisations lead by the Nationwide Building Society have called for Environmental Performance Certificates (EPCs) to be turned into a green property passport scheme.

This would enable the green performance of homes including rental properties to be tracked via a single EPC-based reference point, the group says.

“It is time for the EPC to become a ‘living document’, akin to a building passport, that reflects changes made to the home,” a spokesperson says.

A report by The Nationwide accompanying the campaign says the challenges of upgrading the UK’s ageing property stock is considerable and, as many landlords are aware, using heat source pumps as a replacement for gas boilers is rarely practical.

“Tackling ongoing emissions will be a major challenge, with large parts of the housing stock very ‘hard to heat’ using low carbon technologies in an economic way,” the report says.

“For example, some 81% of all EPC-assessed homes built before 1966 have an EPC rating of D or lower.

“Around one third of the 2.6 million EPC-assessed homes built since 2008 have a maximum potential EPC rating of C or below.”

Raised rating

As LandlordZONE reported last month, the NRLA recently said the government’s ambition to see all rented properties raised to an energy rating of band C or above by 2030 is a ‘pipedream’ unless upgrades are backed with financial and practical support rather than rhetoric.

The Nationwide-led group’s call for an EPC ‘building passport’ are part of a seven-point plan that it says will be needed to jump-start a ‘retrofit revolution’ and help reduce carbon emissions.

A previous attempt to do this, the government’s Green Homes Grant scheme, ended prematurely after many landlords and homeowners found it difficult to source approved contracts to do the work along with the scheme’s complicated application and financing rules.

The group led by the Nationwide also includes British Gas, Energiesprong UK, E.ON, The Federation of Master Builders, Igloo Regeneration, Legal and General Modular Homes, Midas Group Ltd, Professor Tadj Oreszczyn of the UCL Energy Institute, Rockwool UK, Smart Metering Systems, Switchd, and Trustmark.

Read the Nationwide report (opens as PDF).

Read more about property passports.

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London Landlords rush to sell their £10 million property portfolios in less than a week

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You’ve no doubt been watching property prices rise over the past few months, and if you’ve been reading the news, you probably know that experts and private landlords are agreeing, now is the best time to sell your portfolios before we have to wait another 7 years for the next market high.

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