Capitalising on digital and demographic trends in the property market

The rise of e-commerce can arguably be traced back to 1995, when Jeff Bezos boxed up and shipped the first book sold on Amazon.com from his Seattle garage. Since then, almost all major retailers have embraced online sales strategies and started selling items from their own websites.

While much of the market’s recent focus has been on how e‑commerce is challenging the “high street” brick-and-mortar stores, one should consider that a sizeable part of the property market stands to benefit from this trend. As a result of the incredibly fast shift to online retailing, demand for large warehouses (or big-box logistics) is continuing to outstrip supply. This has resulted in higher rents and strong logistics space leasing in core strategic locations. In addition to big-box warehouses that represent the “first mile” of distribution, the “last mile” distribution properties stand to benefit from the rising demand for space that facilitates next-day or even same-day delivery. These properties are urban warehouses strategically located near population centers with easy motorway access, delivering the products to the end-customer. We consider both Tritax Big Box REIT and Pacific Industrial & Logistics REIT are well-positioned to take advantage of this accelerating trend.

Another property sector providing critical infrastructure for the e‑commerce value chain is Data Centres. Data centres are industrial buildings where businesses can rent space for data storage, interconnection and communications hardware. Growth drivers include the surging adoption of cloud computing, e-commerce and digital media, rising demand for computing power and data streaming and the cost advantage of outsourcing IT infrastructure. As more people consume digital content and make purchases online, landlords of data centres are looking to expand faster to meet this increasing demand. One attractive player in this sector is Digital Realty Trust, a globally diversified data centre REIT with a strong track record.

Another significant factor shaping the property market is demographics. Rising numbers of seniors and growing longevity are increasing demand for medical services and health care real estate. The latest projections from the Office for National Statistics suggest that the UK’s proportion of people aged 65 and over will rise from 18.0% in 2016 to 23.9% by 2036. This powerful demographic trend should act as a tailwind for health care real estate. A continuation of the trend towards modern outpatient facilities, along with a rapidly aging population that requires more health care services, should make the sector an attractive investment option. Two trusts that offer a decent proposition are Primary Health Properties and MedicX Fund, both backed by strong management teams with long-term track record in this market.

Further, it has been widely reported that the UK faces a severe housing shortage across all tenures, including social housing. Jones Lang LaSalle reports that there are today approximately 4.3 million people on local authority waiting lists for social housing - a figure that is expected to rise by a further one million over the next five years as the UK population growth rate exceeds that of housing completions. New social homes built in 2016/17 continued to fall well short of demand, reflecting modest levels of government grants available for development. This supply-demand mismatch should both create opportunities for investors and enable local councils and housing associations to mitigate some of the chronic shortage of UK social housing. We favour recently listed Civitas Social Housing to access this market.

Within the TMI Diversified Assets Fund, we identify certain trends that are fundamentally shaping property markets and access these sectors via a range of real estate investment trusts. The importance of stock and sector selection within property markets cannot be understated. As such we remain constructive on certain niche sectors such as industrials/logistics, data centres, health care, social housing, student accommodation and government properties whilst avoiding sectors which we regard as more vulnerable to economic shocks such as high street retail and city offices.

Georgios Nikolaou M.Sc., CFA
Investment Analyst

Article first appeared in:

What Investment (in print on the 1st December 2017)

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