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Rob: In today’s question, we are going to look at, what types of commercial Property Partner focus on and why? Because as we’ve said before, Xavier, there is a whole range of options, out there. So, where do you tend to see performing well and being interesting, at the moment and why are you looking at those kinds of properties?
Industrial property
Xavier: It’s funny because I started my career in industrial property and I suppose that’s the least favoured sector of commercial property investment. The yields are very generous and it is very technical. And I used to look at my colleagues who were dealing with the high street and they were just buying these things.
Rob: Industrial is not quite as interesting.
Warehousing
Xavier: Everything was fine. But the table has turned, enormously, in the last few years, with the Internet. The high street has become very problematic and very difficult. It will establish itself, in a new area but nevertheless, it is difficult.
As with industrial and warehousing, that has become the flavour of the month. So, these big distribution sheds, last-mile delivery and all the rest of it, has driven this sector and a lot of industrial lands has been converted into residential because there is a demand for residential. So, there is a shortage and there is a shortage of supply, both in terms of leasing and in terms of investment.
Rob: So, good old supply and demand, pushing prices up.
Xavier: They really have and so, I think, it is really up with events and has been a big driver of the commercial property returns, over the last year or two. I think, certainly, commercial property, if you look at it as a whole, it has done very well with yield shift but in this particular sector that is what has driven the yields.
Problems on the high street
Rob: Are you seeing any other sectors switching. Obviously, retail has gone the other way. You mentioned, off-camera, before, that businesses like Woolworths and Blockbuster, these big high street brands that everybody knew and trusted and liked for their covenance and leases. Obviously, the market has changed.
Xavier: I live in Fulham and you can’t get down any road without being blocked off by a white van delivery of one sort or another and certainly, I have found that if I am working from home the doorbell is going constantly and it is difficult to concentrate.
So, it is amazing, what has happened over the last few years and it is still going to carry on. Obviously, there is tremendous momentum. So, the high street is really struck by this.
But there are areas where it has become really good. There is an area, where I live, very close by, in Barnes, where they are all independent shops, with a thriving, local community, with an arts cinema and all the rest of it and it has found its equilibrium. But it is going to be much harder in some of these towns in-and-around the country.
Rob: So, what makes it through to get a ‘yes’, from you guys, on a commercial basis? Is there a particular type of commercial property that you really favour?
Xavier: I have seen, like we all have, with the advent of the big supermarkets and the monthly shop that we all used to do, with your twenty baskets, piled high. We’d shove it all in the back of the cupboard and forget about it.
Well, those days are gone and are now, mostly, delivered to the home and what people are doing is they are topping up that, in the local convenience store.
Supermarket chains and convenience stores
So, the first thing we did was, we bought a Sainsbury’s Local, just outside Lemington Spa, in a very nice, residential area. It was where you would go and get your newspaper or a few things for Sunday lunch, things like that. And then you get used to shopping, in that way.
And then if you look at the results of the supermarkets, that is really what they are concentrating on. They have all got a program to roll out these local, convenience stores. They’re prepared to take long leases, for these. They are kind of affordable, in commercial terms.
So, we did one of those. It has got a 15-year lease to Sainsbury’s. The Sainsbury’s covenant is really strong. And if you read their results, which, I think, came out this morning, their six-month results, they are very strong and they have a particular emphasis towards their local, convenience stores. They’ve still got a roll-out, they’ve all got a roll-out, to this area.
Rob: From an investor’s viewpoint, there are options, within that mix of property, that gives them some sort of stability.
Xavier: Yes and I think one of the big, positive aspects of commercial property is its income and you get nice, long leases, well secured. So, this particular one has a 15-year lease and it’s indexed. To get an indexed income, with bond-like qualities, is very difficult and expensive. But we were able to launch that on our site showing, approximately, a 5% return. Very secure and indexed.
So, I think, as an alternative to having the money in a bank or against other asset classes, you have the diversification of something like that, providing a nice steady income, to your portfolio, as a whole.
Rob: Sounds good, thank you.
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