Strength through diversity at listed property investment business
Active portfolio management and reducing exposure to the retail sector have been the keys to success for a £394m real estate investment trust.
Lynda Shillaw, group property director at Leeds-based Town Centre Securities, (TCS) highlighted these other important aspects of the commercial property market when she addressed the latest gathering organised by TheBusinessDesk.com
The Property Lunch, held at Bibis in Leeds City Centre, was sponsored by Bevan Brittan.
TCS is headquartered in the Merrion Centre in Leeds and holds a significant amount of its portfolio in the city. Its portfolio comprises offices, retail and leisure, residential and car parking assets.
Shillaw explained: “We own over 360,000 sq ft of prime office space, let to tenants such as Leeds City Council, Step Change, Pure Gym and the First Secretary of State.
“Fifty per cent of our portfolio by value is in retail and leisure assets let to tenants operating in resilient segments of the retail sector, with a focus on supermarkets, discount and convenience with covenants such as WMorrison, Waitrose and Aldi.
“As we have diversified away from retail we have built a growing leisure portfolio which includes restaurants, coffee shops, gyms and other facilities. These uses now make up 16% of our portfolio by value.
“Our strategy has been to reposition our portfolio by reducing our exposure to retail over the last few years. We have shifted our exposure to retail and leisure from 70% of value in 2016 to 50% today.
“This strategy has enabled us to diversify our income by adding more office, hotel and PRS assets. In addition, while we are long-term owners of the Merrion Centre, our continued investment in the asset has ensured it has continued to evolve and remains as relevant today as it was when it opened 55 years ago.”
Shillaw added that over the last three years, TCS has acquired £29m of assets, 80% of which have been non-retail and are assets such as The Cube on Albion Street in Leeds and Ducie House in Piccadilly Basin in Manchester.
“We believe our focus on the cities of Leeds and Manchester – 77% of our portfolio – creates a point of strategic difference,” she said.
“The economies of both cities go from strength to strength. From a property perspective, while northern regional cities don’t achieve the same highs, there is less volatility through the cycle than seen in London and the South East.”
Shillaw said political and economic uncertainty was making itself felt on the UK property market, warning: “In overall investment terms the UK has suffered net outflows in virtually every quarter since the referendum in 2016. 
“Investors out there are looking for yield, and under normal circumstances where real estate is an attractive source of yield they are hesitating to invest in the UK because of Brexit and the lack of clarity.
“UK Real Estate investment volumes are depressed at about £30bn, which is 35% lower than at this point last year.”
She noted UK residential market sales volumes are slowing, though the number of affordable homes being built in the UK has increased by 20% on the same period last year, up by about 24,500.
“As a fast-growing city, Leeds has a supply shortfall in housing, particularly in the city centre,” she said.
“2019 has seen a shift, against a backdrop of strong demand rents, and capital values are forecast to grow by in excess of three per cent per annum. The city currently has a 1,300-unit pipeline under construction for investors such as with MODA Living, CEG, Legal & General and Aberdeen Asset Management.
“Over the hill, in Manchester, the city centre residential market is set to expand significantly over the next couple of years to support the rapid growth of the city centre population.
“With more than 30 schemes underway, there are some 12,000 units currently under construction to be delivered into the market over the next few years.”
She said landlords had been hit by the turbulence in retail. “Due to stresses in the trading environment the valuation of the retail elements of our portfolio saw its value deteriorate by 5.6% overall year on year,” she said.
“Our relatively robust performance is largely down to the active asset management and targeted investment across the estate and the mixed-use nature of much of our portfolio where our strategy has been to invest in and develop assets which have diversity of uses.”
Turning to offices, she noted private sector office-based employment within Leeds region has grown by 15% over the last five years and is forecast to grow by a further 7.9% over the next five.
“The 10-year average office take-up was exceeded in 2018 by 34%, with developments largely being pre-let or fully let prior to completion,” she said. “Availability of office space in Leeds has been gradually falling since 2015, with 2018 seeing a reduction of 31% in total office supply and a 9% decrease in Grade A space.
“Greater Manchester’s economy is forecast to grow at a rate of 14% over the next five years, well ahead of the UK average of 11%, with 110,000 jobs expected to be created in the next 5 years.
“Vacancy rates for grade A office stock [in Manchester] are relatively low, and rents have risen steadily over the last five years. With a lack of new build space, the city is also seeing significant growth in the Grade B refurbishment market, as these buildings offer an attractive alternative to new developments.”
Shillaw said that while it makes up a very limited component of the TCS portfolio, industrial property has been the “global star performer” in recent years.
“The most recent output from Savills highlights that take up has remained consistently high for units over 100,000 sq ft and Savills research forecast take up to reach at least 31m sq ft by year end,” she said.
“Savills’ analysis of rental growth forecast models highlights industrial and logistics as the only commercial asset class to not experience negative rental growth in a severe economic shock, instead showing a baseline forecast for positive rental growth into 2020.”
