It has been one of the few good weeks for ‘man’ (occupied offices and physical retail) versus ‘machine’ (logistics), with Landsec and British Land both up 20% but declines for Zoom (-15%), Amazon (-6%) and even the seemingly unstoppable Segro (-2.3%).

The investment market is unrecognisable as the market I joined two decades ago. In my early days it was driven by the experienced (and largely domestic) generalist, who ran a balanced portfolio and was thus sector-agnostic. Acquisitions decisions were made on the individual merits of buildings. Since then, the internationalisation of ownership and ready availability of data have meant the identification of global ‘themes’ in buying (prioritising the macro rather than the micro). This in turn has led to sweeping generalisations, the most obvious of which is ‘retail bad and logistics good’ (which has parallels with the Orwellian ‘four legs good, two legs bad’). 

One of the best things about Brits is their radar for being misled. A number of the big owners of retail (mainly listed REITs) have spent the past five years as the property equivalent of Flat Earthers, denying physical retail was in decline, 20 years after Amazon’s arrival in the UK. Masking of rents became an art form, marketing literature was rebranded as research pieces, and confidence in the valuation community collapsed. This has been evident in the massive discounts to NAV in public markets for those companies with any significant retail weighting.

We have received only brief glimpses of contrition since from REIT CEOs. The incompetence reached new levels in 2018, when we witnessed retail-only specialists paying vast costs to international management consultants (who had never let a shop unit) to tell them what was happening in UK retail. In the same year I felt like a whistleblower, having attempted to persuade 450 local authority council members not to invest in multi-let retail, at a series of four CIPFA conferences. It ended up being the highest year for local authority investment in shopping centres in history, but I left with my integrity intact.

I have a lot of sympathy for the property valuation community. As leases have moved from the ‘best in the world’ – 25 years, full repairing and insuring, with upward-only rent reviews – to ten years with a break at five and adopting an all-risks yield valuation approach (as taught at Reading, Oxford Brookes etc.), the results have, unsurprisingly, been unreliable. The regularity of reporting (quarterly or monthly) to benchmark-obsessed clients, who themselves have become like schoolmasters watching A-level league tables, lends tension to this system.

Returning to my comments above about Brits’ BS radar, I don’t think the proptech community has lent much help to the accuracy of valuations. I have not yet seen a proptech tool that can tell me how a retail outlet performs for a retailer, one that can work out how an office works for a CEO and their staff, or one that can indicate whether an individual logistics unit works in a supply chain. As leases get shorter, occupational intelligence becomes more important, as do the leasing community.

There are five macro debates for investors as we approach the end of 2020:

1. Am I too late to the logistics market? – There is not much room for mistakes when buying in yields in the threes. History tells us that inter-specialist trading is a classic late bull market indicator. Do the technological advances in logistics units make second-hand space unlettable?

2. Can the renting community afford a premium offer in the regional PRS market?

3. If you accept that physical retail is competing for a smaller part of discretionary spend, are there subsectors that are more compatible with online (retail warehousing with free car parking, or click and collect). What do the economics of product returns mean for retailer business models?

4. What effect does the normalisation of a three- or four-day office-based week have on demand? There are obvious parallels with the online/physical retail debate a decade ago, when the consensus was that the 5% online would go to 20% (now it’s already hit 30%). Buyers do not like known unknowns, and this question will take years to answer;

5. Demand for long income – demand outstrips supply by a factor of eight in this burgeoning market. This sector will either get re-rated wholesale or it will end badly for late entrants.

The exciting thing about property investment markets are its imperfections. Readily available data and shorter leases mean it has never been more important to get both the macro (themes) and micro (buildings) right.

The views expressed in this article are my own and not those of Savills.