FTSE 350: It will pay more than ever to be selective on Reits

Exposure to political instability and Brexit will affect some more than others; some not at all. The likes of Unite (UTG) are pretty safe as their rental income is paid almost exclusively by the Treasury. There is also a growing awareness (and money is following) that providing purpose-built primary care facilities saves the NHS money because it costs far less to see your doctor than to queue up at A&E.

On a contrarian note, since the referendum, the London office market has come under pressure, even though companies continue to take space. The worry and subsequent downgrading came about because there were fears that thousands of jobs would be lost as a result of a hard Brexit. This now seems more and more unlikely, partly because the negotiations have (finally) moved to the second phase, but also because the government doesn’t have a sufficient majority to push through a hard deal that few would want. If banks retain their passporting rights, office landlords could well receive a boost. Workspace (WRK) is the exception to the prevailing cautious view. Providing purpose-built office space for the many small- and medium-sized companies moving into London has been a rewarding line. Furthermore, there are parts of London that you would previously have travelled through without stopping that are now relatively attractive places to work and live, and Workspace has been at the leading edge of this transformation.

For property in general, the retail sector is expected to underperform because consumers have changed their habits, preferring to shop increasingly online. However, there is some room for optimism for those landlords that cultivate the leisure experience concept, giving large shopping malls Wi-Fi, as well as all the ancillary attractions that customers find will enhance their leisure-related visit.

And the main beneficiaries of this shift in spending habits are those focusing on urban logistics, like Tritax Big Box Reit (BBOX). After the recession, there was virtually no new-build for warehouse use, and this came at a time when the shift to online shopping was gathering pace. So, as well as large (750,000 sq ft) distribution centres, there is a growing need for a hub of smaller outlets to cater for so-called last-mile deliveries. And as consumers tend to pull away from the large hypermarkets, there is good business to be generated from advancing into convenience shopping. Even the large supermarkets are joining in, and NewRiver Reit (NRR) has been concentrating on this side of the market as well as discount retailing, another growth area.

Student accommodation has changed. Instead of a rundown terraced house with six people crammed in, there is growingpreference for purpose-built accommodation, with leisure andeating facilities all built in, together with cooking facilities anda laundry. And despite the effects of Brexit, with only a smallpercentage of students originating from the EU, there is a significant gap between the number of university students and purpose-built places available.

Self-storage is another growth area. The amount of available space per head is a tiny fraction of what it is in the US, and as well as the need for storage space from people moving house, going abroad and such like, there is a growing trend towards de-cluttering, especially when preparing a house for sale. The attraction ofsecuring a site to build a self-storage facility is made easier by the fact that it doesn’t have to be close to a suburban area because customers will inevitably be driving there with their cars full.

So, despite the doom and gloom, the real estate market is likely to remain in pretty good shape in the year ahead. Some smaller sub-sectors will perform extremely well, while the larger companies should be able to tick along quite nicely even though yield compression is by and large a thing of the past. Our preferences out of all the sub-sectors would be urban logistics, convenience shopping and regional offices. The latter have at last seen some rental growth, as demand for space is outpacing supply. In fact, in many parts of the country, supply has been seriously constricted because of the trend to convert offices for residential use.