Schroders boss on why West End offices are a winner

The team at Schroder REIT is hopeful real estate values in the UK are starting to stabilise after sharp falls – and are now eying the sectors they think are well-positioned to come back strong. The REIT this morning posted full-year results that showed its portfolio value falling by a fifth, but a 6% rise in rental income and 9.2% boost to rental value growth allowed it to lift its dividend by 14% over the course of the year. Chair Alastair Hughes said there are now “signs that real estate values are stabilising and approaching fair value”. With that in mind, fund manager Nick Montgomery (pictured) talked EG through the sectors that he and the team believe are likely to outperform – including some, but not all, London office submarkets. “The West End, we feel, is better placed at the moment than the City,” Montgomery said of the capital’s office markets. “In the West End we’ve seen Crossrail have a great impact. In the investment market there are still deals happening. You also have the best and most diversified occupational market – life sciences, alongside tech, alongside media.” Regional perspective In the regions, the office markets will remain polarised, he added. “We’re seeing relatively encouraging levels of demand across the big six,” Montgomery said. “That’s principally because no one’s building. For the limited grade-A space that is available, we’re now seeing Manchester rents potentially getting to £42, £43 per sq ft. Cambridge is ahead of that already. “The big risk in the office market is the Thames Valley and out-of-town in the regions or smaller regional centres, where you have the higher public sector exposure and where there just isn’t the same degree of return to work. “So we feel quite positive about the prospects for the likes of Manchester, Leeds, Edinburgh, Bristol and the Oxford-Cambridge corridor, but [the market] will continue to be polarised, with those cities continuing to benefit disproportionately.” Multi-let matters With industrial real estate accounting for some 48% of the REIT’s portfolio by value, Montgomery said the team will continue to “strongly favour multi-let industrial over distribution warehousing”. “While the tailwinds are there and clearly the online shift is continuing, we’re beginning to see a bit more tenant space in the distribution market on the market,” he added. “For the first time in decades, vacancy is actually higher in London and the South East than it is the regions for distribution warehousing.” And although the team remains “cautious about town centres”, Montgomery said retail still has its place in the portfolio (retail warehousing accounts for almost 12% of the portfolio, standard retail for 7.7%). “Where we have played historically is value retail warehousing and the convenience market, where actually the value grocery, coffee, sandwiches and those types of things are still pretty good – we’ve done a couple of prelets for Starbucks in our retail parks,” the fund manager said. Close to the bottom For now, most parts of the investment markets are defined by caution, Montgomery said, even as dealmakers hope the bottom is near. “There’s very little evidence of people pushing to do stuff in the investment market,” he said. “But the UK has corrected ahead of other European markets. “I think we are approaching the bottom. But what we’ve seen in terms of the inflation print has made people a bit more cautious about what interest rates might do over the short term. “There remains a consensus, which I think is right, that as we go into next year we will see rates trend back down, but probably to maybe 3%, because we have to accept that inflation is going to remain a bit higher than target. But against that backdrop, real estate ought to do OK.” To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews