An update from the managers, Jason Baggaley and Mark Blyth
In this podcast we are joined by Jason Baggaley, manager of Standard Life Investments Property Income Trust, and are introduced to Mark Blyth, recently appointed Deputy Fund Manager on the Trust. They discuss the Trust's performance since the start of the year, recent changes to the portfolio and the trends they are seeing more broadly in the commercial property sector.
Recorded on 16 July 2021.
Discrete performance (%)
|NAV Total return||6.8||-3.8||7.4||16.1||4.8|
|Share Price Total return||-23.5||-0.7||5.7||7.7||7.6|
|Direct portfolio total return||6.0||-1.2||7.7||12.9||6.1|
Past Performance is not a guide to future performance. The price of shares and the income from them may go down as well as up and cannot be guaranteed; an investor may receive back less than their original investment. Benchmark: UK Monthly Index Funds Quarterly Property Index.
Cherry Reynard: Hello and welcome to this Aberdeen Standard Investment Trust podcast, I’m Cherry Reynard. Today I’m talking with Jason Baggaley and Mark Blyth, both portfolio managers on the Standard Life Property Income Trust (SLIPIT). We'll be discussing the commercial property sector today and how the Trust is positioned - welcome Jason, welcome Mark.
Mark, you've joined recently as Deputy Fund Manager on the Trust, can you talk a little bit about your background and your areas of responsibility on the Trust.
Mark Blyth: Yeah of course. So just a bit of background, I qualified as a Chartered Surveyor in 2003 and started working in fund management in 2005, joining what was Standard Life Investments in 2011. I previously worked on a large balanced pooled pension fund at SLI and moving on to the, on to SLIPIT - so relishing the opportunity to work on a more nimble listed property vehicle and taking on all the challenges that come with that.
In terms of the role on SLIPIT, at the moment my primary focus is deploying our available cash into the market, so essentially sourcing and transacting on purchases that suit the fund strategy. And in addition to this the role is essentially supporting Jason on the, on the fund management side, assisting with sort of making strategic decisions, managing the excellent team that we have on the fund and ensuring that we're on track to achieve our goals and maximizing the performance for the investors.
Cherry: Great okay thank you. Jason turning to you, 2020 was obviously a tough year all round but economic recovery seems to be underway. How has the capital performance of the Trust been since the start of this year?
Jason Baggaley: Thanks Cherry, tough is one of the many descriptions we could use for last year. 2021 though is looking a lot more positive, particularly as we go into the second half of the year. So far this year we have seen capital growth across the portfolio, that was quite strong in quarter one - we haven't yet got the figures through for Q2 - but it's pretty positive judging by what's happening in the market. That positivity of course is spread across sectors a little bit, so industrial logistics continuing to perform strongly, we're seeing some pick up in a number of our retail assets, retail warehousing is where most of our exposure is - and that is seeing some capital growth coming through, particularly in the second quarter this year.
And then offices - slightly different story - we're seeing some decline in office value, perhaps not as much as we thought we would do at this stage, but there is certainly a sign of weakness in the office sector.
Cherry: Okay great and Mark what about the income side, what have you seen happening on rents?
Mark: Yeah in terms of the, you know, during the course of the pandemic , the last sort of 18 months, you know with a lot of property funds, you know, the rent collection has been a major focus and the event collection on SLIPIT has held up very well over that last 18 month period. During the course of 2020, we achieved mid 90% collection and we're closing in on 90% for 2021 year-to-date. This has largely been through the efforts of the asset management team and our credit controllers and maintaining a very strong dialogue with our tenants. In addition, the structure of the fund has also helped and with us holding a significantly underweight position to retail, which is as Jason mentioned has been you know the sector impacted most over the last 18 month period and particularly in terms of rent collection and tenant failures. I think it's probably safe to say that whilst the government moratorium on forfeiture for non-payment of rent remains in place, there will be some tenants who are able to pay but seek to take advantage of that by withholding rent - and we continue to work on those situations, and expect as the UK continues its path out of lockdown that the rent collection will improve further and hopefully get back to where we were pre-pandemic.
Cherry: Okay great and Jason, what about any recent changes in the portfolio - anything you've bought or sold?
Jason: Yeah, so people who followed SLIPIT for a while would be used to the fact that we are pretty active in our approach, and it's been no different recently.
So, the first bit of Covid sort of 2020 lockdown, we didn't really transact at all, we wanted to see what the outcomes are going to be. We spent the time really reassessing the portfolio very carefully. And as a result of that, we have transacted quite a bit to reposition - so we've sold out of a number of office assets which we don't believe are going to be future fit - so meet the needs of occupiers in the future - and we've sold out to four offices now.
We also sold a small portfolio of multi-let industrials - these are states where there's small units generally let to more local tenants - and we felt that there was potential weakness in in the occupational market there to come, as we go through what will be a difficult period for many people - so we took the profit on those ones.
And we started to reinvest, and the initial reinvestment has been in the retail warehouse sector. Predominantly we focus so far on DIY, but we are also looking at the budget end of retail warehousing. And the important thing to us is the performance of the store for the occupier, the affordability - so quite low rents - and we're not really buying into sort of fashion retail where we think there's ongoing struggles.
Cherry: Okay and so Mark where does that leave the sort of overall balance of the portfolio today in terms of industrials - versus retail - versus offices?
Mark: You know - well it's in a good, it's in a good place I would suggest. Yeah as I mentioned before, the focus has been historically in the funds is keeping the retail weighting relatively low and currently it's sitting at just over 10%. And with the strong performance coming through from industrials, the fact that the fund is has got awaiting just over 50% in that industrial sector has been really accretive to performance and I think that will continue. Which leaves us sitting with just under 30% offices and about seven and a half percent in other, which is the likes of you know, alternatives such as leisure, data centre and other such sectors. So yes, I think the fund is well positioned from that point of view, being so heavily overweight to industrial wind and you know relatively underweight to retail.
Cherry: And Jason, what about the geographical spread? I mean, I said since there's a lot of sort of fluidity there with, you know officers possibly moving out of city centres and all that sort of thing so how are you positioned there?
Jason: Now that's really interesting, because as a whole we don't expect offices to move out of city centres. The exception could be central London where we might see a move to some of the regional markets around there, but generally we think city centres are going to remain stronger than out of town for offices. Mainly because of their ease of access but also because of the amenity they offer.
But looking at the wider sort of geography of the portfolio. Generally we're quite agnostic to geography, in so much as what we really want to do is to own assets which work for the location they're in and appeal to tenants. So, a good location obviously for logistics, may not be such a good location for an office or retail. And again for retail, it's all about the local conurbation - does the unit suit the local conurbation, and who's going to be shopping etc. Generally, we're ambivalent to geography - however we do have an eye on what's our exposure to Scotland, it's currently around 10% and we like to invest in areas where there's going to be limited new supply coming on. So historically certainly actually we've been slightly worried about investing in Wales, where the planning regime was a little bit looser. And for example, retail warehousing, there was just an oversupply - so it's all about the local market and the units rather than the actual geography.
Cherry: Okay and Mark, what about what's happening with valuations. I mean, do you think they've come back far enough in sort of under pressure areas like the High Street and you know is there any value emerging there. And are there any parts of the market where they've possibly gone too far or does it all look reasonably balanced today - you know reflecting the risks.
Mark: Yeah, that, that's a good question and certainly it is an unenviable job being a valuer in the best of times, let alone in such difficult times as we are experiencing at the moment. The main reason being, there's generally a lack of transactions from which to build up a picture of market value and that's both in the investment - so the purchases and sales market - but also in letting side of things from which to derive sort of a guide on rental value.
Valuations are always sort of backward looking, so relying on that transactional evidence from which to gain a picture of where things sit. So as we as we've discussed today the industrial market is very strong and there is constantly, you know, a lot of demand driven from a lot of investors to invest in that market and that is pushing, you know, prices higher and higher and I think that valuers are generally finding that quite difficult to keep up with. And so I think there is there is some lag in that sector, in terms of being behind pricing that's being paid in the market. The converse to that is somewhere like shopping, you know, you touched on retail, and the shopping centres is probably a good example where for instance you know there's very few transactions happening in the shopping centre market - so you know how do you price that or how do you value assets in that sector.
And it's incredibly difficult and sometimes you know, there has to be an element of sentiment taken into the valuations, which can lead to, can lead to being you know differences, or you know it becomes a sort of relatively subjective view of what the actual pricing is.
In terms of retail more generally, I think the values are probably a little bit behind perhaps on retail warehousing, I think that market is moving quite quickly as Jason mentioned, but it’s trying to, trying to get that balance of not trying to be ahead of the market in terms of pricing on either the way up or the way back down again. So yeah it's a challenge, it's a challenging time but yeah I think values are broadly where they need to be, there's probably a bit more movement and that will come through as transactions appear and as we start seeing more investment in lots of different sectors, you know in the retail sector particularly.
Cherry: And Jason, there's an enormous amount of sort of discussion, much of it affecting the commercial property sector at the moment, so things like what is the future of the office, what's the future of agile working, you know, the future of the high street and what that's going to look like with the advent of e-commerce. I wonder what your views are on those sort of big macro trends you know, what are you seeing on the ground - is it changing as much as people think?
Jason: Absolutely, I think we’re in a really exciting time to be honest with lots of change. And so the list that you gave, I think I'd add ESG. I think it's fascinating that normally in a recessionary type of environment or very difficult environment, people forget about ESG because it's a cost. Actually, this time around it's been very different, it's really come to the forefront, so we are in a period of extreme change. Within that though there are really just accelerations of trends rather than totally new phenomena. I think the death of the office is overdone, but the use of an office will change and there will be less demand, I think there is more downside risk on offices – certainly. We need to provide offices where people want to go and work and as long as we can provide the occupiers with a level of amenity and wellness and we look after them properly, I think officers will do quite well. The war for talent, that young people in organizations want to be able to grow and develop and it's much easier to do that actually sat at a desk, with other people sat around you.
Retail has obviously had a torrid time, but I would say that we're certainly in a place today where not all retail is bad and we will selectively increase our retail exposure - mainly through retail warehousing, be that food, budget, it’s all about affordability. And industrials have had a fantastic time - or logistics in particular - a fantastic time. I don't believe that all logistics are equal though and we will make sure that we have stock which will appeal to a range of occupiers and works efficiently for them. So, I think in a period of time one has to go back to fundamentals in the bottom-up approach, to making sure that the assets will meet the needs of the occupiers into the future.
Cherry: Absolutely, Mark let's zero in on that ESG element. I know you've talked about kind of future proofing the portfolio by putting these sort of ESG considerations at the forefront of your decision making. Can you just talk about that in a bit more depth, you know possibly give some examples of what's happening in practice?
Mark: ESG is a major, major focus for us on the team in SLIPT, Jason has insisted that in every member of the team, it is one of the core goals that ESG be a focus on every single decision that is made on the fund. And so, you know the team needs to be able to demonstrate that they are making those considerations on all the decisions and that's not necessarily just on purchases - it could be on sales, it could be on lettings, it could be on management decisions around the building in particular. So, it really is something that is drilled into us and is a core value for the Trust.
In terms of specifics we are having a lot of conversations and we are picking up with more and more of our tenants on a daily basis to try and discuss what we can do on their properties – with, in conjunction with them - to improve the particular environmental credentials of the building.
So as examples you know we have, we have six PV schemes that are up and running at the moment – including the largest PV scheme that Aberdeen has done in the UK, which we have on a building in Sandy, which you know is up and running and producing power as we speak. We've also got 20 other active discussions on going on PV and also electric vehicle charging points as well, and that's really something that we, you know, we are, we are actively you know pursuing with all our tenants and we want to be at the forefront of the ESG discussion, you know, zeroing in on net zero emissions and really looking at the embedded carbon as well as the operational carbon. So, on buildings for instance that we're looking to acquire, we’re not only just looking at EPC ratings in BREEAM where we are targeting the best ratings that are possible, we're also now starting to have discussions on the embedded carbon within these buildings, to really, you know, look at the entire life cycle of the building from its construction as well as the operation with the tenant in place.
And we've also having a couple of exciting discussions on going, a couple opportunities that we are pursuing at the moment, which we can't say too much about at the moment - but hopefully we will be able to in in the near future, which again, really will highlight the fact that SLIPIT is doing, is leading on its ESG and carbon reduction and carbon offset in the property market. So, we hopefully have news on those in in the very near future. But it's something we take extremely seriously and it's something that's a real focus for the fund.
Cherry: Okay great Jason, in terms of from an investor point of view inflation has obviously been, you know, the big sort of cross asset discussion point this year. Do you think commercial property can still provide a good kind of protection against inflation?
Jason: Yeah I mean historically obviously one of the benefits of a real asset class like Real Estate, has been that it's considered to provide the hedge against inflation. I think there's a - I think it's a very difficult question to answer at the moment, because I do believe that it's going to depend very much on the nature of the inflationary drivers. If it's driven through growth and lack of capacity, then there is a good chance that we will see the rent and asset valuation increase which will provide some protection. Offices, perhaps less so because I think that the demand side is going to be negative for offices and therefore, we won't see the rental growth. But assuming that there's economic growth, I think retail and industrial can - but it's not going to be a match so there is likely to be a slight lag before we really see that protection coming through.
Cherry: Great and then just finally, Jason, I wonder if you could kind of wrap up by giving your thoughts on the next 12 months or so for the sector.
Jason: So, I almost hate to say this but I’m relatively optimistic. I look across our portfolio and you know where we've got some vacancy, we're generally seeing quite good levels of interest. Obviously disappointed that the later return to the office is slow down maybe some office interest but generally things are looking quite good.
Many occupiers we are engaging with are more positive and they're seeing trade pick up. There's definitely a weight of money in the market perhaps driven by the attractive level of income in real estate versus some other asset classes, but I think there's also, you know, a bit of a caution is required - short-term inflationary pressure, Brexit making it difficult for a number of companies still, all of these factors are going to hold us back a little bit I think, but generally our thoughts next 12 months is we're quite looking forward to the new normal.
Cherry: Great okay thank you Jason, thank you Mark - that's an optimistic note to end it on. You can find out more about the trust at www.SLIPIT.co.uk that's S.L.I.P.I.T.