28
Classification: only to be shown if not public Latest opportunities in property markets Guy Glover, Peter Lowe Jason Anderson Property 771137 – UK For professional investors only
Classification: only to be shown if not public
Latest opportunities in property
markets
Guy Glover, Peter Lowe
Jason Anderson
Property
771137 – UK
For professional investors only
Classification: only to be shown if not publicInvestment risks
2
The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and
investors may not get back the original amount invested.
The value of directly-held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and
significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of
your investment.
Classification: only to be shown if not public
3
Agenda
• 2019 – Market review
• Property – Offering income in a low return environment
• Amazon versus the rest – What next?
• Brexit in four simple charts
• Responsible property – A different approach
• Opportunities for 2020
• Questions
Today’s agenda
Classification: only to be shown if not public2019 – Property: a tough but balanced scrum
4
Historic low
bond yields
Risk premium
Low vacancy
Controlled
development
Lower
leverage
Occupier
demand
GDP
forecasts
Political
uncertainty
Retail malaise
Absolute
pricing
Classification: only to be shown if not publicSheds and beds, together with regional offices lead the way
5
South East industrials have been the strongest performer, delivering 11.2% over the year. Alternatives and Rest
of UK offices also performed well, delivering 6.3% and 6.4% respectively.
-20%
-15%
-10%
-5%
0%
5%
10%
15%
StandardRetail - South
East
StandardRetail - Rest of
UK
ShoppingCentre
RetailWarehouse
Office - City Office - WestEnd & Mid
Town
Office - Restof South East
Office - Restof UK
Industrial -South East
Industrial -Rest of UK
Other All PropertyTypes
Income Return Market Value Rental Growth Equivalent Yield Impact Total Returns
Past performance should not be seen as an indication of future performance. Source: MSCI UK Monthly Property Digest June 2019
Classification: only to be shown if not public
Offering income
in a low return
environment
Classification: only to be shown if not publicProperty continues to offer an attractive income premium over fixed interest and gilts
7
5.2
0.75
0.45
2.2
4.3
0
1
2
3
4
5
6
7
8
9
Jan 00 Jun 02 Nov 04 Apr 07 Sep 09 Feb 12 Jul 14 Dec 16 May 19
%
MSCI UK Monthly Property Index UK base rates 10 year gilts BAML Sterling Non-Gilt Index FTSE 100 Income Return
Source: MSCI UK Property Index, Datastream as at 30-Jun-19. 10 year gilt as at 16-Aug-19. FTSE International Limited (“FTSE”) © FTSE 2019.
Income return January 2000 – June 2019
Past performance should not be seen as an indication of future performance.
Classification: only to be shown if not publicImportance of income as a counter to volatility
8
0
5
10
15
20
25
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
%
12 month All-Property Income Returns and Total Returns (%)
Income Return Total Return
Source: MSCI UK Quarterly Property Index for Standing Investments June 2019
The contractually backed, relatively stable and consistently positive income return underpins property performance
Past performance should not be seen as an indication of future performance.
Income
76%
Classification: only to be shown if not publicSustainable locations
9
Source: BMO Real Estate Partner as at September 2019
• Multi-let estate comprising two
industrial units
• Tenant in Unit B not in occupation
• Surrender agreed to facilitate a new
letting to Hire Station Ltd at a new
rent 30% higher than the previous
passing rent.
• Lease to Homebase until Dec 2020
• Homebase to remain in 24,000 sq ft
at an improved rent
• New foodstore and drive-thru being
developed on remainder of site
• Long lease to Sainsbury’s with 14
years unexpired
• Five yearly rent reviews with RPI
linkage, compounded annually
• Future residential development site
BalhamLutonStaines-upon -Thames
Classification: only to be shown if not public
Amazon
versus
the rest
Classification: only to be shown if not public
The historic relationship between retail sales and retail rental growth has faltered. Online
penetration, particularly for non food, and rising input and occupancy costs are all factors.
Retail sales are positive but online market share continues to grow
11
Annual Retail Sales & Retail Rental Decline to 2019 (%)
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9Annual Retail Sales Annual Retail Rental Growth
0
5
10
15
20
25
30
35
40
Total Retail Sales Non Food Sales
Growing share of online sales (%)
Source: ONS as at August 2019, MSCI UK Monthly Property Index, PMA, DRSI Source: Property Market Analysis (PMA) June 2019
Classification: only to be shown if not publicSo what’s the impact…?
12
Bricks and mortar retail is facing challenges from multiple factors, and there is a scarcity of new retailers
entering the market. Whilst we do not believe that in-store retailing is dead, the rulebook has been ripped up on
traditional retail.
• Growth of online shopping to continue
• Retailers have to adapt to an omni-channel model
• Bricks and mortar retail will still play an important part of retailers’ strategies, supporting omni-channel retailing
• Stores become showrooms and collection points as well as retailing locations
• Significant rental declines in poorer, oversupplied locations
• Shopping centres particularly suffering from a ‘contagion’ effect
• Even in stronger locations rent models in retail assets are coming under scrutiny.
• Could turnover rents become the new norm?
Source: BMO REP September 2019
Classification: only to be shown if not publicBut it’s not all bad news!
13
Source: BMO REP September 2019
• Lease to Cath Kidston expired
May 2019
• Cath Kidston vacated
• New 10-year lease to Seasalt
agreed at a higher rent
• Only two weeks’ void incurred
• Lease to Vodafone expiring in
April 2021
• Vodafone put lease on market
• Two parties bidding for a new lease at
higher rent
• 15,400 sq ft high street unit arranged
over 4 storeys
• Relet on a 10 year lease to Savers
Health & Beauty
• New rent 7% ahead of valuation and
sets strong comparable evidence for
the Fund’s holdings in Rayleigh (x2
outstanding rent reviews)
The retail vacancy rate across the house portfolio is just 1.7%
Winchester High Street Edinburgh, Princes Street Rayleigh, 55 High Street
Brexit
Classification: only to be shown if not publicBrexit – in four simple charts
15
Source: Property Data July 2919, Savills August 2019, MSCI Monthly Index August 2019, ONS August 2019
0
5,000
10,000
15,000
20,000
25,000
Overseas Domestic Long-Run Average
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
2015 2016 2017 2018 2019YTD
City West End
City take up
~
1m sq ft in
July
0.0
5.0
10.0
15.0
20.0
25.0
2016 2017 2018 2019
Industrial 12 month total returns (%)
Net investment volumes (£m) Central London Office take-up (sq ft)
Construction cost index (100 = Jan 2010)
95
100
105
110
115
120
125
201
4 M
ay
201
4 A
ug
201
4 N
ov
201
5 F
eb
201
5 M
ay
201
5 A
ug
201
5 N
ov
201
6 F
eb
201
6 M
ay
201
6 A
ug
201
6 N
ov
201
7 F
eb
201
7 M
ay
201
7 A
ug
201
7 N
ov
201
8 F
eb
201
8 M
ay
201
8 A
ug
201
8 N
ov
201
9 F
eb
201
9 M
ay
Our leading
ESG approach
Classification: only to be shown if not publicResponsible Property Investment (RPI) – a comprehensive approach
17
Property interventions constantly monitored
EPC = Energy Performance Certificate; GRESB = Global Real Estate Sustainability Benchmark
✓ 100% renewable energy
✓ Green lease clauses
✓ GRESB participant – 40% increase in score- green
stars awarded
✓ Intensity-based energy, water and waste reduction
targets
✓ Sustainability reports acquired on acquisition
✓ Annual RPI reports produced – EPRA Gold Award in
2019 for quality of reports
✓ ISO14001 Environmental Management
accreditation across all managed assets
✓ Living Wage accreditation – BMO UK Property Fund
Classification: only to be shown if not publicA spotlight on Royal Standard Place, Nottingham
18
Source: BMO REP September 2019
Owning property assets directly allows for physical interventions to improve the environmental and social
impact of our buildings
• £2.2m comprehensive refurbishment incorporating significant
sustainability improvements including:
✓ High efficiency heating and cooling design for reduced
energy consumption
✓ Roof-mounted solar panel system generating c.4,000 kWh
of renewable energy p.a.
✓ Occupancy sensing lighting and water controls to reduce
unnecessary usage
✓ Installation of three Electric Vehicle charging points
✓ New cycle storage, shower and changing room facilities£2.2m refurbishment
Classification: only to be shown if not publicResidential Responsible Investment
19
Creating a sustainable and defensive income stream from a growth sector
The BMO UK Housing Fund has been designed to impact the UK housing
shortfall by attracting long-term institutional investment through the
delivery of flexible build to rent stock nationwide.
It aims to:
• Create a mid priced long-term rental product targeting the mass market and
incorporating affordable private rent
• Deliver a solution for an under provided segment of the residential market focused on
low to middle income families such as key workers
• Build sustainable homes underpinned by sustainable communities
• Utilise an ESG approach that goes beyond traditional environmental concerns and
supports the Fund’s investment objects by protecting income and improving the
resilience of schemes
• Work with partners to achieve our joint social missions
Opportunities
for 2020
Classification: only to be shown if not publicLower for longer
21
Source: PMA Summer Scenario 2019
With global bond yields set to remain ‘lower for longer’, property returns could be boosted due to the strong
inverse relationship between returns and the lagged yield gap
Past performance should not be seen as an indication of future performance.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Main scenario Main Growth Lower Bond Yields Lower Growth & Lower Bond Yields
UK All Property Returns (% pa)
Classification: only to be shown if not publicSectors for opportunity
22
Source: BMO REP July 2019
BMO REP Forecast Total Returns by Segment 5 years to 2023 - per cent per annum
Estimates and forecasts are provided for illustrative purposes only. They are not a guarantee of future performance and should
not be relied upon for any investment decisions. Estimates are based on assumptions and subject to change without notice.
This is a projection for information purposes only and is not guaranteed.
-1.6
1.4
2.0
3.6
4.7
5.0
5.2
5.2
5.2
5.3
6.0
-2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Shopping centres
Standard retail
Retail warehouses
All Property
Alternatives
Standard industrial
City offices
Rest of UK offices
Distribution
West End offices
South Eastern offices
Classification: only to be shown if not publicPositioned to perform
23
Source: BMO REP September 2019
• Multi-let regional office building
situated in the heart of Leeds CBD
• One small suite to let – some
competition from serviced offices
• ‘Plug and play’ fit-out provided to
appeal to smaller occupiers
• Suite now let at £33 psf, compared
to an ERV of £26 psf
• Single-let well-specified
distribution asset located in
Basingstoke, with close links to
the M3
• Let on a 10 year lease to Bunzl
UK Ltd at c.£9 psf
• Potential to capture rental growth
at rent review
• Long-let hotel leased to
Travelodge for 20 years
• Drive-thru Starbucks on site
leased for 25 years
• Both leases provide for 5-yearly
fixed uplifts linked to RPI
• Yielding 5%+ with inflation-
linkage
Bury St Edmunds Leeds Basingstoke
Classification: only to be shown if not publicToday’s agenda
24
UK Property
– risks and
opportunities
• No exuberance in values since 2016 –
Brexit has dampened the cycle
• Retail is severely challenged
• Asset management can preserve or add value
• Industrial is the star performer but caution on over
exuberance
• Income dominates future positive return
Appendix
Classification: only to be shown if not publicFriars Square Shopping Centre – A Cautionary Tale
26
Source: Friars Square
Next
New Look
Supercuts
River Island
2525A
Trespass
Roman Originals
Dorothy Perkins
Peter’s
HaIrdressers
Surelock Holmes
Dead Universe Comics
BHS
Wallis
Sup
erd
rug
Offic
e H&M
Blu
e In
c.
SW
1
Ba
rbe
rs
Noodle
Nation
Clin
ton
s
Cla
ire’s
Porcelland
Caffé Nero
Mr Simms Olde
Sweete Shoppe
TopShop
House of Fraser
Waterstones
Perry’s Aylesbury
O2
H. Samuel
3 store
Pandora
Thorto
ns
Holla
nd &
Barre
tt
Ern
est J
ones
Shoe
Zone
Pink Squirrel
26 27
28
29
31/32
STORE B STORE A
33
36
37
38
2723/24
22
21
20 16/17
16A/17A
12A/15 7 5/6
12 13 8/10
4 2/3 1
1A
1B
1C
46444039/ 41 42 43P1
K1
K2K3
K5
K6
K4
Burton
35
34
EE
45
Next
New Look
Supercuts
River Island
Shoe Zone
2525A
Trespass
Cards Direct
Roman
To Let
To Let
To LetSurelock Holmes
Pumping Iron
To Let
Superd
rug
Offic
e H&M
Cla
rks
SW
1 B
arb
ers
Noodle NationS
mig
gle
Clin
tons
Cla
ire’s
Dead Universe Comics
Wenzels
Caffé Nero
Eurochange
TopShop
TOPMAN
House of Fraser
Waterstones
The Entertainer
O2
H. Samuel
3 store
Vis
ion
Exp
ress
EE
Pandora
Warre
n J
am
es
Holla
nd &
Barre
tt
LG
The Gym Group
Ern
est J
ones
Metro
Bank
Amazon
Lockers
To Let
26 27
28
29
31/32
STORE B STORE A
33
34&35
36
37
38
2723/24
22
21
20 16/17
16A/17A
12A/15 7 5/6
12 13 8/10
4 4A 2/3 1
1A
1B
1C
45/46
444039 41 42 43
P1
K1
K2K3
K5
K6
K4
Friars Square leasing Plan as at 2015 Friars Square leasing Plan as at 2019
Classification: only to be shown if not publicDisclaimer
27
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.
This document:
• has been issued and approved by, and is the sole responsibility of, BMO REP Asset Management plc of 7 Seymour Street, London W1H 7JW (“BMO REP”) which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (registration no. 119283).
• is for professional investors/advisers only and the information in it may not be appropriate for all persons in all jurisdictions in the world. By accepting this document, you represent and warrant that you are an appropriate person to receive such information.
• should not be considered as nor constitute as any investment, tax, legal or other advice and you should obtain specific professional advice before making any investment decision. Nor is it an offer or solicitation to deal in any of the investments or funds mentioned in it, by anyone in any jurisdiction in which such offer or solicitation would be unlawful or in which the person making such an offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation.
• contains confidential information belonging to BMO REP and/or third parties and is supplied to you solely for your information and may not be forwarded to any other person, reproduced or published in whole or in part for any purpose.
No representation or warranty, express or implied, is given by BMO REP, or any other person as to the accuracy or completeness of the information or opinions contained in this document. Save in the case of fraud, no liability is accepted for loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information or opinion contained in this document.
© 2019 BMO Real Estate Partners LLP. Registered in England and Wales with number OC338377. Registered Office: 7 Seymour Street, London W1H 7JW. BMO REP Asset Management plc is a subsidiary of BMO Real Estate Partners LLP and are members of the BMO Financial Group, which is itself wholly-owned by the Bank of Montreal.
FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.
The BMO UK Housing Fund mentioned is the BMO UK Residential Real Estate FCP-RAIF, a reserved alternative investment fund in the form of a common investment fund.
Classification: only to be shown if not publicContact us
©2019 BMO Global Asset Management. Financial promotions are issued for marketing and information purposes; in the United Kingdom by BMO Asset Management Limited, which is authorised and regulated by the Financial Conduct
Authority; in the EU by BMO Asset Management Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by BMO Global Asset Management (Swiss) GmbH, which is authorised and
regulated by the Swiss Financial Market Supervisory Authority (FINMA).
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