Austrian-born architect Victor Gruen is widely recognised as the father of the modern shopping centre, designing the first purpose-built outside shopping mall called Northland Mall near Detroit in 1954.
The post-war economic boom allied to the rapid rise in consumerism saw shopping centres become a global phenomenon. Such was the success of the Austrian-designed, American-born shopping centre that it is said that while Gruen tried to make America more like his hometown of Vienna, he ended up making Vienna more like America.
But, times have changed. Over the last decade or so, physical bricks and mortar retail in the UK has become distressed, with online shopping certainly playing its part. High street name after high street name has fallen into administration over that time as shoppers swapped the queues for shopping on their smartphones.
Despite this backdrop, many funds are still overexposed to UK retail. That overexposure has consequences. Recently, M&G gated its Property Portfolio fund as investors fled due to fears over retail as well as Brexit uncertainty. Hammerson is now seeking to offload its out-of-town retail portfolio, while Standard Life Aberdeen is reportedly keeping a close eye on its £1.3bn property fund — which has an over 50 per cent allocation to retail — following M&G’s problems.
Many may point at the open-ended structures and insist they have learnt nothing since 2016, the last mass gating of property funds when Brexit jitters made investors panic about the liquidity of real estate. But the fact is that fund allocations take time to adjust. And, retail has traditionally been a solid play that tracked consumer spending. The fund universe is a traditional one, and for many fund managers, the fact is they are rewarded by how they compare to their peers.
Most long-term investors are benchmarked against the Investment Property Databank (IPD), meaning that if you match the IPD weightings you are fine. Essentially, taking a risk is not worth it. Many institutional funds still maintain a high weighting to retail.
Clearly, though, the time has come for the smart fund managers to make a shift. Heavy exposure to retail is not sustainable over the short to medium-term, let alone the long-term, anymore. But to which real estate sectors should they ramp up their allocations?
The answer is residential, particularly demographically backed and structurally supported sectors like build-to-rent (apartments and houses), PBSA (student) and the nascent later living sector.
Strangely, these assets are labelled as alternative when all of them are about putting a roof over someone’s head — as fundamental a real
estate sector as you can imagine.
In particular, UK build-to-rent has matured beyond the point where it should be labelled as an alternative. Investment is expected to hit £75bn by 2025 and Savills reckons the asset class at maturity will be worth over 50 times its £10bn valuation today.
Driving that growth is the fact that the assets are primed to capitalise on long-term demographic trends of more people living and renting for longer, and wanting a higher quality experience compared to traditional landlords.
This isn’t just a London phenomenon either — regional UK build-to-rent is firmly established. We, for instance, are working with Moda Living on more than 6,000 apartments in cities across England and Scotland.
Crucially, for long-term investors, these assets are income-producing plays. Against a backdrop of economic uncertainty, of low-interest rates and low inflation, income-producing investments are providing the best value across the board. This is particularly true for real estate.
Smart fund managers need to think about reallocating their exposure to build-to-rent, to PBSA and, increasingly in the future, later living. Of course, there will need to be more build-to-rent projects delivered to build the critical mass needed to attract large institutional investment. But with many projects coming downstream, that reality is not far away.
Mervyn Howard is executive chairman at Apache Capital Partners