Commercial property: building for future trends

13/02/2017

Download

​Ainslie McLennan, Co-Manager of the Henderson UK Property PAIF, examines some of the future trends that are likely to shape commercial property markets in the years to come. She identifies seven trends that she believes will help shape markets and explains how these trends are factored into portfolio construction and asset management initiatives.

Shifts in commercial property markets are often a visual embodiment of society’s underlying drivers and values. While factors such as location, specification and occupier demand will continue to shape property valuations, developing trends, driven by technological and social change, are likely to have a growing importance on investment returns. Here we introduce seven key trends:

1. Mixed-use facilities

Increasingly, office occupiers are attracted by the presence of retail or some form of leisure experience, while shopping centres should benefit from close proximity to office populations and leisure facilities, such as cinemas, bars and restaurants.

Millennials expect to be able to shop, work and socialise when they like, and not necessarily make unique journeys for each. In order to attract young talent, office occupiers’ location strategies are increasingly focused on where that talent wants to live, and so we see office and residential quarters encroaching on each other, with the common ground being leisure or retail. Buildings or estates that successfully combine a number of different use types are likely to enjoy higher footfall, longer dwell times, and ultimately become more productive. An example of a mixed-use asset within the Henderson UK Property PAIF can be found in Bermondsey, South London, and includes office, retail, residential, restaurant and cinema elements.


Bermondsey, South London

Bermondsey, South London

Source: TH Real Estate

2. Data storage: it’s all about the location

Source: iStock

The world is becoming more information centric. Society’s reliance on creating and consuming data continues to grow, as does the need for data to be available when and where it is needed. To sustain business activity, enhance IT service delivery, and enable new applications, data requirements will continue to grow and require more processing, network, bandwidth and data storage capacity.

Nowadays, organisations of all sizes are faced with having to do more with less, including maximising IT resources against footprint constraints. Beyond simply finding space to store data, organisations need to keep digital information safe, private and secure, in order to protect intellectual property rights. In the second quarter of 2015 the Henderson UK Property PAIF acquired a data centre in Romford, Essex, which is an excellent location with strong demand due to its proximity to Central London. The PAIF also owns a data centre development in London Docklands, which will offer 140,000 square feet of space and is due to be finalised later this year.

3. Retail and logistical distribution integration – further evolution

Technology’s impact on the retail sector, and the secondary effects on the distribution warehouse market, will lead to a further blurring of the two sectors. Shopping apps and expectations of same-day delivery have required redesigns of retailers’ distribution networks and the use of stores for e-commerce fulfilment.

E-commerce is presumed to have a negative impact on the retail sector, but physical stores in the right locations are still the primary point of retail sales as two-thirds of online sales involve a pre- or post-transaction store visit.

Ikea distribution warehouse in Corby, Northamptonshire, run by CEVA Logistics

Ikea distribution warehouse in Corby, Northamptonshire, run by CEVA Logistics

Source: TH Real Estate

4. Retail outlets: growing popularity

It’s cool to love a bargain these days. Shoppers’ perceptions and behaviour have changed and outlets have become trendy, with the retail sector evolving from factory outlets selling surplus stock to designer outlets with high-end concepts. The sector is in a strong state, with rising rents, low vacancy rates and buoyant occupier demand for well-located assets.

Retail outlets typically have lower operating costs, making them more profitable than traditional retail locations, and their value offer has proven resilient to economic fluctuations and the onslaught of the internet. In the bad times, people value discounts and in the good times, luxury thrives.


Dalton Park, Murton, County Durham

Ikea distribution warehouse in Corby, Northamptonshire, run by CEVA Logistics

Source: TH Real Estate

Dalton Park, a retail factory outlet mall in Murton, County Durham, is owned by the PAIF. It comprises approximately 160,000 square feet of retail property space with around 60 tenants including M&S, Next and Gap. During the third quarter of 2016 a leisure development scheme was also completed on behalf of the PAIF at the site. It includes a seven screen cinema and complementary food and beverage offerings, which should also increase footfall and turnover for existing tenants. The scheme is fully let to Cineworld, Prezzo, Pizza Express, Frankie & Benny’s, KFC and McDonald’s.

5. Impact of driverless cars

Source: iStock

The transition from manual to autonomous driving may have significant knock-on effects for cities, towns and general infrastructure. Landlords will need to keep an eye on any potential requirements for driverless car park requirements, such as drop-off zones.

6. Sustainability matters

As investor preference for carbon efficiency continues to emerge, products that have an explicit sustainability strategy will become more widespread. These will encompass investments in stock that already outperforms the market, and also investment into assets with the intention of improving their sustainability and value. Our approach to sustainability is to ensure that it is embedded into asset management and this has led to a number of successful initiatives, such as the installation of highly energy efficient LED lighting and the enhancement of recycling zones. Dalton Park and Ealing Gateway (West London) have been a recent focus.

Ealing Gateway, West London

Ealing Gateway, West London

Source: TH Real Estate

We are also seeing increased demand for electric car-friendly parking, with additional charging points installed at the PAIF’s office holdings in Rickmansworth and Cambridge.

Capital Park, Cambridge

Capital Park, Cambridge

Source: TH Real Estate

7. Health, well-being and productivity considerations

This will continue to be a significant trend to watch as more landlords and tenants explore how they can benchmark and improve health and well-being factors such as natural light, air quality and active design. Various methodologies are likely to emerge and more information will develop, demonstrating the link between health and well-being in buildings and productivity.

Tenants are increasingly taking account of health and well-being factors when seeking new space and as such this is a key consideration for property investors such as us. We always strive to develop close relationships with our tenants to better understand their requirements.

Future proofing property investments

Our nine-strong investment team at TH Real Estate*, which manages the Henderson UK Property PAIF through a sub-investment management agreement, has to be forward looking by nature. Understanding the trends with the potential to fundamentally change our lives and our landscapes is key and sustainability issues are taken extremely seriously from a social and economic point of view.

Staying in touch with the attitudes of consumers, occupiers and employees helps shape our investment strategy and better understand what our towns, cities and commercial retail centres will look like in the future.

*TH Real Estate manages £78.8 billion in property assets globally and the nine-strong investment team has support from more than 400 multi-disciplined property specialists.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson UK Property PAIF

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

Specific risks

  • This Fund is dual priced. The price at which you buy shares/units in the fund will incorporate the transaction costs incurred in buying physical properties. When you sell shares/units in the Fund the price you sell at incorporates the transaction costs incurred in selling physical properties. The difference between these prices is called the ‘spread'. This spread is currently c. 5% and reflects the high transaction costs of buying and selling commercial property. Typically the buying price of an individual commercial property can be 7-8% higher than the selling price. The spread of the Fund is not fixed and may vary over time depending on the composition of the Fund.
  • Some or all of the Annual Management Charge and other costs of the Fund may be taken from capital, which may erode capital or reduce potential for capital growth.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund contains assets which may be hard to value or sell at the time and price intended. In particular, property investments may take a considerable time to sell. When many investors want to sell their shares, the Fund may have to delay processing requests so that certain assets or properties can be sold first. This is known as deferring redemptions.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Valuations are determined by independent property experts. The valuation of property is generally a matter of valuer's opinion. The amount raised when a property is sold may be less than the valuation.
  • Tenants in the Fund's properties may become unable to pay their rent. As a result, the Fund's income may be impacted and further costs incurred.

Risk rating

Share

Invest in the power of disruption

Powerful themes are shaping, and being shaped by, disruption.

Click to read our investment managers’ insights.



Related funds

Classifications

Important message