Ainslie McLennan and Marcus Langlands Pearse, Co-Managers of the Janus Henderson UK Property PAIF, look back at 10 years of managing the fund together and ahead at the changing dynamics of the UK commercial property market.
What have been the biggest changes in the asset class?
During the last 10 years we have experienced a shift from balanced commercial property portfolios, only comprising office, industrial and retail assets, to now including the alternatives sector. This area of the market includes student accommodation, residential, leisure-based assets, such as gyms, cinemas and hotels in addition to data centres, private healthcare, care homes, and garden centres.
These ‘alternative’ assets have become increasingly popular and sensible diversifiers within funds because they are well placed to benefit from long-term demographic and technological trends. They also tend to attract tenants on long leases with rental income that is often linked to inflation or with periodic fixed increases. We invested into this segment early, which has served the fund well, and continue to have a significant weighting.
Technology is making the industry ever more dynamic and efficient. Take the office sector as an example. Working from home is now accessible for most employees, meetings can take place with colleagues located on the other side of the world and shared ‘flexible’ office space has become popularised amongst the freelancing community. Alongside advancements in smart building technology, health and wellbeing are also quite rightly areas of focus.
How have the changes in the retail sector affected your approach?
The expected shift in the way we shop in the UK has finally come to pass with winners and losers at a company level. Our long-held view has been that the retail sector, particularly regional high street assets and department stores, would come under pressure. As a result, early on we started diversifying away from traditional areas of the market to maintain an appropriate, broad mix of assets that we believe to be best suited to the conditions ahead.
On the flip side of the retail restructuring, investors have enjoyed the benefits of owning high-specification and well-positioned logistical and distribution units. Demand for this type of asset has grown as retailers and consumers look for efficiency in how they acquire or deliver goods. We expect this trend to continue as the shift to online shopping takes hold.
What have been your main successes and challenges?
We think that our long-standing approach of focussing on owning property assets that offer an attractive and reliable rental income stream, with some long-term income and capital growth potential, has been very supportive for investors. While markets have risen, we also see our investment decisions on buying and selling have added significant value. Recent examples include selling a single-let office in Southwark, South London, crystallising significant outperformance and buying a vacant industrial unit, which we subsequently let to Amazon. We have tried to be very front foot about actively selling or buying assets where we see opportunities to benefit investors.
The other main success has been growing, and enjoying working with, such a stellar team who are all extremely dynamic and talented individuals that are crucial to implementing our investment strategy.
Challenges include the elusive and much discussed topic of Brexit, which has felt like planning for nobody knows what! It has, however, led us to adopt a more defensive strategy that we believe should be able to sustain itself through any upheaval that comes to the fore when the UK leaves the European Union.
Have you ever revised your investment philosophy?
We regularly challenge ourselves on the approach but have had the view from the beginning that a daily-traded fund should aim to have a very large amount of its assets in core, well-located, well-connected, well-let, energy-efficient property that is relevant for the businesses of today and that the disruptors forming tomorrow’s enterprises would wish to occupy. We define core assets as being top class in at least three of the following five criteria: location, quality of tenant, lease duration, lease structure, and building specification.
Has sustainability become an increasing focus?
Sustainability has always been an important element of our investment approach. In our view, it is just the right thing to do and helps mitigate depreciation, lowers operational costs and helps to prevent building obsolescence.
We strive to improve on absolutely every level with regard to responsible property investing.
For example, we have installed photovoltaics (solar panels) on the roofs of many of our assets and are considering installing them in car parks too. We have electric vehicle charging points in car parks, 4d boxes in buildings providing live-time data that shows where energy is being wasted and where efficiency could be improved. More recently, for instance, we have focussed on the living wage for staff that provide security or cleaning services associated with buildings owned by the fund.
What is your outlook for the asset class?
We believe the fundamentals are relatively stable for the sub markets that we choose to have exposure to. It’s such a dynamic and interesting time to be in the industry and we have the opportunity to help maintain, improve and create excellent buildings and spaces for businesses to occupy and investors to benefit from.
Our expectation is for steady returns from the asset class dominated over the medium term by income, with potential ‘wins’ from asset management – delivering longer or more favourable lease terms and refurbishments – to add income and capital growth wherever possible.