Ainslie McLennan, Co-Manager of the Janus Henderson UK Property PAIF, explains that a recovery in the economy should over time be positive for good-quality, well-located UK commercial property, but sustainability, selectivity, and diversification will be key.

  Key takeaways:

  • Selectivity and diversification may seem contradictory companions, yet they can exist in harmony within a portfolio.
  • Assets well placed to deliver net zero carbon emissions and asset management to ensure properties are energy efficient should be attractive to tenants.
  • UK commercial property that is currently positioned to benefit from long-term technological, demographic and sustainability trends has, arguably, the best chance of benefiting from the recovery in the economy.

 

While the coronavirus pandemic has reinforced the need for an agile and flexible workforce, the office debate continues in terms of the need for more space at work to social distance versus lower levels of attendance in the office. The global work from home initiative for non-essential employees accelerated the drive for more efficient technologies and has intensified the focus on health, wellbeing and productivity in the workplace. While UK office investment transactions lag past trends, there is a boom in activity and sky-high pricing in science parks.

Sustainability matters

We have a very selective approach to office investment. One example is Capital Park in Cambridge, which provides high-quality accommodation to office and high-tech companies. At this prime office location, we have installed solar panels to the roofs of the office buildings and are installing a solar car port to harness renewable energy. This enables green electricity to be generated onsite and to power electric vehicle charging.

Capital Park, Cambridge. Source: Nuveen Real Estate, June 2021.

More broadly, we continue to drive forward with the commitment to become operationally net zero carbon across the Janus Henderson UK Property PAIF portfolio by 2030. Assets well placed to deliver net zero carbon emissions and asset management to ensure properties are energy efficient should bode well against ever increasing regulation around this area and be attractive to tenants, who are taking a much more pro-active stance on how their brands consider sustainability.

Selectivity: online beneficiaries

The ability to work from home more often allows for decentralisation where residential locality is less influenced by the proximity to major cities or central office hubs. It adds to the convenience of home deliveries and supports online retailing. Increased home working also drives local consumption patterns, which should continue to benefit food retailers and retail parks, notably those with a grocery anchor tenant, and some independent retailers.

The knock-on effect of a boom in online sales is that demand for logistical-based assets continues unabated despite property pricing now looking very keen across this segment of the market. Until 2014, logistics was just a subcategory of the generally unloved industrial sector. Seven years later, it is the most sought-after real estate sector. As a result, rents on logistical assets have upside potential should the sharp rise in construction material costs impact development programmes.

Diversification

Selectivity and diversification may seem contradictory companions, yet they can exist in harmony within a portfolio. The rapid transformation in retail and the disruption to office working demonstrates the importance of having a blend of assets and cash flows from different types of tenants, albeit ones that are aligned with core structural themes. In our view, UK commercial property that is currently positioned to benefit from long-term technological, demographic and sustainability trends has the best chance of benefiting from the recovery in the economy.

Glossary

Asset management: can include refurbishment work to improve valuations and attract a better quality of tenant, changing the planning use of assets to increase rental revenue, or renegotiating existing leases to extend tenancies.