Commercial Property Training
James Allum – Client Portfolio Manager
Moira Gorman – Client DirectorPrepared for London Borough of Hounslow
(not to be used with or passed on to retail clients)
October 2018
Section 1
What is Commercial Property
Investment?
So, what is Commercial Property?
3
Source: IPD Index Sector Weightings, as at 30 June 2018.
Office High Street Retail Retail Warehousing
Car Showroom* Hotel* Leisure*
Industrial
Sector Weights in Market Retail Office Industrial Other *
IPD Monthly Index 34.3% 31.1% 26.3% 8.3%
How Does Commercial Property Derive a Return?
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Two components of Property returns:
Income Return – “Yield” and “Rental Growth”
(Occupational Markets)
Capital Return – Market Movements (Capital
Markets)
Understanding both markets is key
Source: IPD UK Monthly Index, as at 30 June 2018.
-30%
-20%
-10%
0%
10%
20%
2000 2003 2006 2009 2012 2015 2018R
etu
rn
IPD Income Return IPD Capital Return
Income forms the core component of total
return
2000-2018 YTD income = 70% of total return
Section 2
Why invest in Commercial Property?
0
2
4
6
8
10
12
14
3 year 5 year 10 year 20 year
UK Property UK Equity UK Gilts
Strong total returns
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Portfolio diversification
Low correlation with other asset
classes
Relative performance
Rewards long-term investor
Source: Columbia Threadneedle Investments, as at 31 August 2018.
UK Property – IPD Actual, UK Equity MSCI UK Gross Return, UK Gilts JPM 7-10 Yr Gilts.
Total return by asset class
Section 3
How to make money… and how to lose it!
How to make money…
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Timing…Timing…Timing!
Buy strong fundamentals
Target distressed vendors
Buy mispriced risk
Acquire assets with potential to add value
Undertake extensive due diligence
Diversify
Don’t be afraid of taking profit
How to lose money!
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Timing…Timing…Timing!
Buy weak fundamentals
Over leverage
Compromise in investment strategy – pressure to
invest
Weak due diligence
Failure to diversify
Greed…
Section 4
Property case studies
Property case study –acquisition 2018Mis-priced property risk – an imperfect market
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All intellectual property rights in the brands and logos set out in this slide are reserved by the owner.
Springfield Retail Park, Haverfordwest, South West Wales
Sector: Retail Warehouse
Valuation: £17.5 million (NIY @ 7.6%)
Description:
2008 developed 101,500 sq ft
dominant retail park benefiting from a wide Bulky Goods
Planning Permission.
Average Weighted Unexpired Lease Term (to break
option) of 9.6 years.
Investment Considerations:
‘Off market’ acquisition. Distance from London limits those
prepared to do the due diligence
Fully let to seven tenants –Wickes, Currys/PC World,
Homebase, Pets at Home, Carpetright, DFS and Topps
Tiles
Modest rental tone £14.50 per square foot, appropriate for
area
Location means limited competition from internet same
day delivery services.
Tenants trade well reducing CVA risks
Property case study – acquisition 2017Unrealised asset management potential
12
Deeside Industrial Park, Deeside
Sector – Multi let industrial
Valuation: £40.8 million (NIY @ 7%, RY @ 8.4%)
Description:
Well configured 818,162 sq ft multi-let industrial estate.
46 separate units
4 development sites totalling 11.75 acres.
36 separate tenants
(10%) of vacant accommodation in nine units.
The AWULT (to break option) across the asset is 5.5
years
Investment considerations:
Severe shortage in supply of accommodation in the North
West industrial leasing market
Pricing underpinned by vacant possession value /
replacement cost
Huge potential to add value through pro-active asset
management
Requires systems and personnel capable of active
management to exploit the opportunity
All intellectual property rights in the brands and logos set out in this slide are reserved by the owner.
Property case study – disposal 2018Profit crystallisation and risk reduction
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65-68 South Molton Street, London W1
Sale Price: £55 million
Sector – Retail/Office
Description:
Prime Mayfair, long leasehold, mixed use retail/office asset
(33% retail and 67% office) fully let to 10 tenants.
Average retail rents reflect £480 ZA and average office rents
reflect £57.50 psf overall.
Tenure: Long Leasehold
Disposal Rationale
Limited potential to add value through proactive asset
management.
Sale at £55M reflects 2.8% NIY reflects peak pricing for
comparable Mayfair long leasehold assets with limited
rental growth potential.
Sale crystallises a significant profit valuation
Sale decreasing exposure to ex growth central London
assets at premium investment pricing.
Profit on Valuation: £5.3 million (9% uplift)
All intellectual property rights in the brands and logos set out in this slide are reserved by the owner.
Important information
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For internal use and for Professional and/or Qualified Investors only (not to be used with or passed on to retail clients)
All data is sourced from Columbia Threadneedle Investments as of 31st March 2018, unless otherwise stated.
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