News Analysis: The evolving habits of UK consumers have compressed yields across the retail property sector over recent years, but experts say there are still attractive opportunities for pension fund investors searching for returns.
Mars Pension Fund has sold out of several of its UK property holdings across both the retail and office sectors over the past year.
Back in May, LaSalle Investment Management marketed a portfolio of seven retail centres on behalf of the fund, including the Kingdom Centre in Glenrothes and the Westside Plaza in Edinburgh.
In addition, last month it was reported that Mars Pension Fund also put the UK’s largest privately owned network of science and technology parks on the market.
The portfolio covers 348 acres across five sites and includes Langstone Technology Park in Hampshire, Kent Science Park and Hexagon Tower in Manchester, all acquired by LaSalle investment management on behalf of the fund since 2002.
A spokesperson from Mars said: “The Mars Pension Fund makes investment decisions to achieve the best rate of return.
Property values have had a very good run… capital values will not be keeping pace to very recent levels
Nick Ridgway, Buck Consultants at Xerox
“Our property allocation forms an integral part of our overall investment portfolio and any changes made are part of the normal investment cycle.”
Nick Ridgway, head of manager research at Buck Consultants, said persistent expectations of low inflation puts long-lease properties at risk of becoming “over-rented” and of a subsequent value correction.
“When it comes back to market [the value] is potentially going to be inflated and there could a correction in capital value down the line,” he said.
Consumers driving the market
The outlook for retail is also being shaped by the growth of online shopping and ‘click and collect’ services, leading property managers to increasingly favour distribution houses and out-of-town centres, to the detriment of the high street.
But Matthew Peake, fund manager at M&G Real Estate, said UK retailers have had time to adapt their consumer offering and respond to the changing environment, honing their strategy to support an online presence with physical stores.
To this end, several major UK retailers have reduced their total number of stores to around 50, down from 150-200 nationwide, specifically targeting more affluent locations such as Bath, Cambridge and Guildford, while a north-south divide continues to focus the prime market in London and the southeast.
Peake said there are relative value opportunities to be found in the retail property sector.
“Compared to other sectors that have seen significant yield compression and emerging rental growth, retail has offered relative value – but selectively,” he said.
“The sort of asset now proving popular in the market, retailers are generally focusing on the stronger towns where there are solid fundamentals in place with real rental growth potential.”
Long-term outlook
Ridgway urged pension fund investors to take a long-term view in property and remain mindful of the very strong run across property sectors over the past two years.
“If they are in for the long term they can weather the transaction costs and benefit from the higher income relative to where gilts are,” he said.
“Property values have had a very good run… capital values will not be keeping pace to very recent levels. There could be a softening of capital-value appreciation to more normal levels.”
