Fiona Rowley, M&G Property Portfolio

Reasons to be positive over UK commercial property in 2014

Fiona Rowley (pictured), manager of the M&G Property Portfolio, says the outlook for UK commercial property in 2014 continues to improve, driven principally by the strengthening UK economy. 

Fundamentals supporting this include continued growth in GDP (0.7% in Q2 2013), falling unemployment and increasing house prices.

While the high street remains subdued as retailers rationalise their portfolios of stores, out-of-town retail parks are benefitting from ‘click and collect’, free parking and larger, more profitable stores. Additionally, active asset management of tenant mix and unit configuration can add value for in-town shopping centres.

To gain exposure to the opportunities in these sectors, we recently acquired a shopping centre in Sutton Coldfield with strong income and attractive asset management opportunities, and two retail parks in Northampton and High Wycombe.”

Rents for offices in the South East are starting to grow as demand for office space increases, and this trend is expected to spread to the ‘Big Six’: Manchester, Birmingham, Leeds, Bristol, Edinburgh and Glasgow. Yields available from prime London offices have been compressed due to interest from overseas investors, while those available in regional centres provide a significant yield arbitrage and thus are attractive to overseas and domestic investors alike.

In response, we have made acquisitions of recently let, high quality offices in Edinburgh, Uxbridge and Leeds to capture this rental growth.

Prospects remain good for industrial assets as demand for distribution units from e-tailers in particular is expected to drive rental growth. We have acquired warehouses in Bristol and the East Midlands – both key distribution hubs and both of modern construction and design to suit occupiers’ demands. The London and South East industrial sector also looks set to benefit from the restricted supply of new premises given many historical sites have been redeveloped for alternative uses. The Fund recently acquired a modern high bay distribution warehouse in Belvedere, Greater London, an area witnessing increasing demand given its proximity to the City and Central London.

Figures from Investment Property Databank (IPD) demonstrate that capital values grew on a three-month basis in June 2013 for the first time since October 2011, supporting Fiona’s view that prospects remain good for UK commercial property in 2014. “After bottoming out in late 2012, total returns have accelerated throughout 2013 and I expect this to continue in 2014. Improved sentiment arising from positive economic data should underpin this outlook.

Nonetheless, investment should be on a selective basis. We have seen very strong returns from prime London assets and it is my view that some of the most attractive opportunities now lie in secondary properties in regional centres where there is the prospect of a narrowing yield gap with prime. We will continue to pursue interesting assets in carefully selected locations and we hope to announce further acquisitions before the year end.
 

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