As the UK government weighs the possibility of a second national lockdown, fortunes for listed commercial property groups continue to diverge. The early reading of the sector’s early-October trading updates suggests the dynamics which emerged when the economy went into deep-freeze in March – mounting strain on leisure and hospitality tenants, surprising resilience from offices, and surging demand for logistics assets – remain firmly in play.
Last month, we cautioned that retail property groups’ widening discounts to book value were increasingly justified by the huge strains on tenants and the difficulties of re-purposing shopping centre assets.
That dynamic is typified by NewRiver REIT (NRR), whose portfolio comprises pubs, high street units and shopping centres. In a slightly stronger update than the market had expected, management said rent collection had improved slightly, with 84 per cent of second quarter rents either paid, deferred or re-geared. Property disposals are also ahead of plan, providing a much-needed boost to liquidity.
Though Great Portland Estates (GPE) says its low leverage and liquidity leave it "well prepared for any eventuality", many areas of the central London property group’s portfolio remain challenged. Just over four-fifths of March and June's quarterly rent has now been collected, though rental deposits were required to boost September's rent collection figure to 73 per cent.
Just 21 per cent of retail, hospitality and leisure clients have paid this quarter’s rent, which partly explains why chief executive Toby Courtauld only singled out the firm’s belief in “the long-term appeal of well-designed and located offices”. The occupancy among GPE’s office portfolio currently stands at 27 per cent, suggesting tenants have been proved far more resilient.
We recently pointed to this attribute as an important differentiator for city-focused commercial landlords, singling out Helical (HLCL) and CLS Holdings (CLI) as two groups whose rent rolls insulate them from the broader economic malaise.
London and Manchester-focused work office specialist Helical has now received 94.7 and 91.3 per cent of rents contracted for the March and June quarters, with 84 per cent of the September quarter rent "demanded to date" now in the bank. By the end of the year, the group believes collections will have increased to at least 90 per cent – a proportion already achieved by CLS, which has also received 99 per cent of cash due for the first three quarters from an office portfolio spread across UK, Germany and France.
An ever-stronger appetite for logistics and warehouse properties was reflected in a third quarter trading update for FTSE 250 constituent Tritax Big Box REIT (BBOX), whose shares hit an all-time high of 165p this week. Record demand for its distribution centres and a "noticeable increase in enquiries" – all buoyed by this year’s acceleration in the shift from in-person shopping to online sales – are leading to further opportunities for yield compression. The sale of four assets in the period for £134m allowed Tritax to hit its annual disposal target, and at a 12.5 per cent internal rate of return.
The picture is similarly rosy at logistics-focused REIT LondonMetric (LMP), which is already seeing a return to quarterly payments and has collected 94 per cent of rent due by 1 October. A further 3 per cent is expected "imminently" and another 2 per cent deferred. Another warehouse-focused group whose premium to book value we recently said is justified is Urban Logistics (SHED), which has already collected 99 per cent of rent due for the December quarter.
Until this year, the rise of logistics centres had been associated with questions about the long-term viability of supermarkets as tenants. The sector’s resilience throughout the pandemic was given another vote of confidence last week, as Supermarket Income REIT (SUPR) increased its share placing to £200m. Even then, the Reit’s board said the fundraising, struck at 104p-a-share, was oversubscribed.
Investors have equally warmed to shares in Home REIT (HOME), which began trading on Monday (12 October) after it raised £241m. The group will use to the funds to invest in property providing accommodation for the homeless, which its managers believe will allow it to pay an annual dividend of 5.5p – an income case whose supposedly risk-free status we recently suggested might be overplayed.
