Retail warehousing returns on the rise…and outperform offices

Over the past 12 months the UK economy has become more resilient to lockdowns and figures just published showed that GDP grew by 0.4% month-on-month in February with the expectation that the rate of growth is accelerating, linked to the speed of the vaccine rollout. With shops and outdoor hospitality now open, retailers’ cash flow is improving. Online retailers have prospered during the pandemic with penetration rates peaking at 36% in January compared with 22% in January 2020. This will inevitably reduce as physical retail finds its feet again but shoppers have become more accustomed to buying online and it will continue to be a key platform for consumer expenditure. As a result there will be sustained occupational demand for logistics property serving online retailers.

However, amid all the negativity over physical retail property and the broad based adverse yield adjustment over the past 18 months, retail warehousing is emerging as a stronger performer and an attractive recovery play. As with return polarisation between sectors, there is also divergent performance within the retail sector. Those retailers that were able to stay open during lockdown have prospered, particularly supermarkets and value retailers. Click and collect has been an important feature of this success.

During the pandemic we have concluded a number of lettings to retailers on out of town retail warehouse parks including leases to B & M, The Range, Food Warehouse and Aldi among others. Fashion and fashion parks however, remain firmly out of favour and have seen significant falls in rental values as vacancy rates increase in response to some high profile tenant failures and retailers reducing their physical footprint.

These trends are not just observational. MSCI quarterly data from the Monthly Index shows two consecutive quarters of positive return for the first time since October 2018 and also outperformed offices. This interrupted a sequence of 48 months of underperformance compared with other property sectors.

Within retail, retail warehousing is leading the way with attractive returns available to investors adopting a highly selective approach to asset selection. At Advent Capital Investments Ltd we are closely monitoring the retail warehousing sector as a potential buying opportunity, although careful stock selection is critical given significant disparities within the segment.

James Thornton - Non-Executive Chairman