Picton Property Income Limited Annual Report 2021

Retail andLeisure market trends

Office market trends

What thismeans for Picton ӱ The office sector now brings a heightened level of risk, as long-termworking from home continues to impact the sector. ӱ With weaker occupier demand, the focus is on quality of office space. Our offices must continue to go above and beyond occupiers’ expectations. ӱ We will need to provide more flexible leasing arrangements reflecting the current market. ӱ There is a greater emphasis on wellbeing within the office environment. Our response to these trends ӱ We will continue to actively manage the office portfolio and engage with existing and potential occupiers to grow occupancy and income. ӱ We have been upgrading space, focusing on amenities, and making improvements in energy efficiency. ӱ Due diligence and research will ensure that the office portfolio is positioned in the most accessible and desirable locations. ӱ We will be increasingly selective when considering office acquisitions. With office workers proving during the pandemic that working from home is a viable option, many companies are likely to incorporate an element of flexible and home working post-pandemic in a hybrid model, but the office is by no means redundant. Reflecting uncertainty surrounding the sector, during the year to March 2021, capital values decreased -4.5% and yields moved out 20 basis points. Rental values declined -1.0%. The role of the office is evolving into a hub for face-to- face interaction, collaboration and team building, and plays an important part in attracting talent, showcasing company culture, training and mentoring. The layout is likely to change, with the ratio of desk to collaborative meeting space switching, leading to less densely populated offices rather than a dramatic reduction in floorspace. Occupiers are seeking higher quality, digitally capable, sustainable spaces with a greater emphasis on employee wellbeing. Vacancy rates have risen but remain low by historic standards, and with limited new supply in the pipeline it is not expected that rental values will suffer more than a short-term dip. London and large city centre office markets are forecast to perform better than the All Property average.

Both the retail and leisure sectors have been severely affected by the pandemic and occupier failures. The retail sector has experienced a price correction, with capital values falling -12.9% and rents down -9.0% in the year to March 2021. Even as restrictions ease and trade improves, it looks unlikely that there will be sufficient demand to fill the high numbers of vacant units. The sector faced oversupply and legacy issues prior to the pandemic which have only been exacerbated. The UK Government’s change in use class restrictions will gradually allow repurposing of retail space and tackle the demand/supply balance in the longer-term. Until the oversupply is addressed in town centres, we do not expect to see any significant recovery in capital or rental values. However, it is increasingly apparent that there is not a ‘one size fits all’ outlook for retail and leisure property. Retail warehouses are starting to plateau and are forecast to strongly outperform shopping centres and high street retail.

What thismeans for Picton ӱ We will continue to maintain an underweight position to the retail and leisure sectors. ӱ We have had to provide rent holidays and assistance on a bespoke basis to help our occupiers through the crisis. ӱ We expect rental income in this element of the portfolio to remain reduced in the short to medium-term.

Our response to these trends ӱ We will seek to maintain occupancy, even if this means having to accept lower rental levels. ӱ We will continue to reposition retail assets and reduce our weighting through disposals, seeking opportunities to sell to special purchasers and owner-occupiers where appropriate. ӱ With revised pricing, we will look cautiously at potential acquisitions within selective retail sub-sectors.

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