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771137 – UK
For professional
Classification: investors
only to be shown if not only
public
Property
Latest opportunities in property
markets
Guy Glover, Peter Lowe
Jason Anderson
Investment risks Classification: only to be shown if not public
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.
2
Today’s agenda Classification: only to be shown if not public
• 2019 – Market review
• Property – Offering income in a low return environment
• Amazon versus the rest – What next?
Agenda • Brexit in four simple charts
• Responsible property – A different approach
• Opportunities for 2020
• Questions
3
2019 – Property: a tough but balanced scrum Classification: only to be shown if not public
Historic low
bond yields GDP
forecasts
Risk premium
Political
Low vacancy uncertainty
Occupier
demand Retail malaise
Controlled
development
Absolute
Lower pricing
leverage
4
Sheds and beds, together with regional offices lead the way Classification: only to be shown if not public
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.
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Standard Standard Shopping Retail Office - City Office - West Office - Rest Office - Rest Industrial - Industrial - Other All Property
Retail - South Retail - Rest of Centre Warehouse End & Mid of South East of UK South East Rest of UK Types
East UK Town
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
5
Classification: only to be shown if not public Offering income in a low return environment
Property continues to offer an attractive income premium over fixed interest and gilts Classification: only to be shown if not public
Income return January 2000 – June 2019
9
8
7
6
5 5.2
%
4.3
4
3
2.2
2
1 0.75
0 0.45
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
Past performance should not be seen as an indication of future performance.
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.
7
Importance of income as a counter to volatility Classification: only to be shown if not public
The contractually backed, relatively stable and consistently positive income return underpins property performance
12 month All-Property Income Returns and Total Returns (%)
25 Income
76%
20
15
%
10
5
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Income Return Total Return
Past performance should not be seen as an indication of future performance.
Source: MSCI UK Quarterly Property Index for Standing Investments June 2019
8
Sustainable locations Classification: only to be shown if not public
Staines-upon -Thames Luton Balham
• Multi-let estate comprising two • Lease to Homebase until Dec 2020 • Long lease to Sainsbury’s with 14
industrial units years unexpired
• Homebase to remain in 24,000 sq ft
• Tenant in Unit B not in occupation at an improved rent • Five yearly rent reviews with RPI
linkage, compounded annually
• Surrender agreed to facilitate a new • New foodstore and drive-thru being
letting to Hire Station Ltd at a new developed on remainder of site • Future residential development site
rent 30% higher than the previous
passing rent.
Source: BMO Real Estate Partner as at September 2019
9
Classification: only to be shown if not public Amazon versus the rest
Retail sales are positive but online market share continues to grow 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.
Annual Retail Sales & Retail Rental Decline to 2019 (%) Growing share of online sales (%)
10.0 40
8.0 35
6.0 30
4.0 25
2.0 20
0.0
15
-2.0
10
-4.0
5
-6.0
0
-8.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total Retail Sales Non Food Sales
Annual Retail Sales Annual Retail Rental Growth
Source: ONS as at August 2019, MSCI UK Monthly Property Index, PMA, DRSI Source: Property Market Analysis (PMA) June 2019
11So what’s the impact…? Classification: only to be shown if not public
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.
• • Bricks and mortar retail will • Significant rental declines
Growth of online shopping • Even in stronger locations
to continue still play an important part in poorer, oversupplied
rent models in retail assets
of retailers’ strategies, locations
• Retailers have to adapt to are coming under scrutiny.
supporting omni-channel • Shopping centres
an omni-channel model retailing • Could turnover rents
particularly suffering from a
become the new norm?
• Stores become showrooms ‘contagion’ effect
and collection points as
well as retailing locations
Source: BMO REP September 2019
12But it’s not all bad news! Classification: only to be shown if not public
The retail vacancy rate across the house portfolio is just 1.7%
Winchester High Street Edinburgh, Princes Street Rayleigh, 55 High Street
• Lease to Vodafone expiring in • 15,400 sq ft high street unit arranged
• Lease to Cath Kidston expired
April 2021 over 4 storeys
May 2019
• Vodafone put lease on market • Relet on a 10 year lease to Savers
• Cath Kidston vacated
Health & Beauty
• New 10-year lease to Seasalt • Two parties bidding for a new lease at
higher rent • New rent 7% ahead of valuation and
agreed at a higher rent
sets strong comparable evidence for
• Only two weeks’ void incurred the Fund’s holdings in Rayleigh (x2
outstanding rent reviews)
Source: BMO REP September 2019
13Brexit
Brexit – in four simple charts Classification: only to be shown if not public
Net investment volumes (£m) Central London Office take-up (sq ft)
25,000 14,000,000
20,000 12,000,000
10,000,000
15,000 City take up
8,000,000
10,000 6,000,000
~
4,000,000 1m sq ft in
5,000
2,000,000 July
0 0
2015 2016 2017 2018 2019
YTD
Overseas Domestic Long-Run Average City West End
Industrial 12 month total returns (%) Construction cost index (100 = Jan 2010)
25.0 125
120
20.0
115
15.0 110
105
10.0
100
5.0 95
2014 Aug
2015 Aug
2016 Aug
2017 Aug
2018 Aug
2015 Feb
2016 Feb
2016 May
2017 Feb
2018 Feb
2019 Feb
2014 May
2014 Nov
2015 May
2015 Nov
2016 Nov
2017 May
2017 Nov
2018 May
2018 Nov
2019 May
0.0
2016 2017 2018 2019
Source: Property Data July 2919, Savills August 2019, MSCI Monthly Index August 2019, ONS August 2019
15Our leading ESG approach
Responsible Property Investment (RPI) – a comprehensive approach Classification: only to be shown if not public
✓ 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
EPC = Energy Performance Certificate; GRESB = Global Real Estate Sustainability Benchmark
Property interventions constantly monitored
17A spotlight on Royal Standard Place, Nottingham Classification: only to be shown if not public
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
£2.2m refurbishment
✓ New cycle storage, shower and changing room facilities
Source: BMO REP September 2019
18Residential Responsible Investment Classification: only to be shown if not public
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
Creating a sustainable and defensive income stream from a growth sector
19Opportunities for 2020
Lower for longer Classification: only to be shown if not public
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
UK All Property Returns (% pa)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
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
Past performance should not be seen as an indication of future performance.
Source: PMA Summer Scenario 2019
21Sectors for opportunity Classification: only to be shown if not public
BMO REP Forecast Total Returns by Segment 5 years to 2023 - per cent per annum
South Eastern offices 6.0
West End offices 5.3
Distribution 5.2
Rest of UK offices 5.2
City offices 5.2
Standard industrial 5.0
Alternatives 4.7
All Property 3.6
Retail warehouses 2.0
Standard retail 1.4
Shopping centres -1.6
-2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
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.
Source: BMO REP July 2019
22Positioned to perform Classification: only to be shown if not public
Bury St Edmunds Leeds Basingstoke
• Long-let hotel leased to • Multi-let regional office building • Single-let well-specified
Travelodge for 20 years situated in the heart of Leeds CBD distribution asset located in
Basingstoke, with close links to
• Drive-thru Starbucks on site • One small suite to let – some
the M3
leased for 25 years competition from serviced offices
• Let on a 10 year lease to Bunzl
• Both leases provide for 5-yearly • ‘Plug and play’ fit-out provided to
UK Ltd at c.£9 psf
fixed uplifts linked to RPI appeal to smaller occupiers
• Potential to capture rental growth
• Yielding 5%+ with inflation- • Suite now let at £33 psf, compared
at rent review
linkage to an ERV of £26 psf
Source: BMO REP September 2019
23Today’s agenda Classification: only to be shown if not public
• No exuberance in values since 2016 –
Brexit has dampened the cycle
• Retail is severely challenged
UK Property
– risks and • Asset management can preserve or add value
opportunities • Industrial is the star performer but caution on over
exuberance
• Income dominates future positive return
24Appendix
Friars Square Shopping Centre – A Cautionary Tale Classification: only to be shown if not public
Friars Square leasing Plan as at 2015 Friars Square leasing Plan as at 2019
Porcelland Dead Universe Comics
SW1 Barbers
Supercuts
Barbers
Supercuts
SW1
16A/17A Noodle 16A/17A
Noodle Nation
Nation
12 13 8/10 12 13 8/10
New Look New Look
Next Next
Superdrug
Superdrug
Blue Inc.
Office
Clarks
Office
H&M 1A
H&M
1A Wenzels
Clintons
Claire’s
Smiggle
Clintons
Claire’s
20 16/17 20 16/17
1B Caffé Nero 1B Caffé Nero
River Island
River Island 21 12A/15 7 5/6 4 2/3 1 1C Mr Simms Olde 21 12A/15 7 5/6 4 4A 2/3 1 1C Eurochange
Sweete Shoppe
39 40 41 42 43 44
22 44 45 46 Shoe Zone
22
K4 P1 38 39/40 41 42 43 K4 P1 38
Vision Express
Ernest Jones
Warren James
H. Samuel
Holland & Barrett
2723/24 2723/24 H. Samuel
Thortons
Pandora
Holland & Barrett
Ernest Jones
45/46
Pandora
Surelock Holmes Shoe Surelock Holmes
EE
TopShop
To Let
EE
TopShop 37 37 Metro
Dead Universe Comics 25A 25 O2 Zone Pumping Iron 25A 25 TOPMAN O2 Bank
K1 K1
36 36
K5 K5
K6 3 store K6 3 store
K3 K2 K3 K2
Peter’s 26
Trespass 27 35 To Let
26
Trespass
27 34&35
LG
HaIrdressers 28 28
The Entertainer
Roman Originals 34
Perry’s Aylesbury Cards Direct The Gym Group
33 33
29
Pink Squirrel Roman
29
To Let
31/32 31/32
Burton
Waterstones Waterstones
Dorothy Perkins To Let
STORE B STORE A STORE B STORE A
BHS House of Fraser House of Fraser
Wallis To Let
Amazon
Lockers
Source: Friars Square
26Disclaimer Classification: only to be shown if not public
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.
27Contact us Classification: only to be shown if not public BMO Global Asset Management (EMEA) – Head Office BMO Global Asset Management – Edinburgh Exchange House 6th Floor, Quartermile4, Primrose Street 7a Nightingale Way, London EC2A 2NY Edinburgh EH3 9EG Tel: +44 (0) 20 7628 8000 Tel: +46 (0) 207 628 8000 bmogam.com Extensive worldwide investment capabilities • Total focus on clients • Comprehensive range of products and solutions • Defined expertise – including a suite of specialist investment boutiques ©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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