Picton Property Income Limited Annual Report 2022

Strategic Report

Financial Statements

Additional Information

Governance

Market driver

Impact

Occupational and investor demand The property market is cyclical, with performance linked to economic growth. The balance of supply and demand in the investment and occupier markets impact pricing and rental growth respectively. Historically, all property sectors have moved through cycles broadly in unison; however, more recently there is a greater divergence between sectors brought about by structural drivers. The Covid-19 pandemic accelerated trends that affect the use of commercial property, for example remote working and online retail.

In 2021 the MSCI Quarterly Property Index reported a huge increase in industrial capital values, with robust occupier and investor demand and limited supply resulting in surging rents and yield compression. Although it is not expected that this pace will be maintained, demand from a wide range of occupiers is likely to underpin this sector’s performance going forwards. The role of the office is evolving. Although the Government advice to work from home where possible has now been reversed, many office-based businesses are still establishing a new normal and incorporating an element of flexible working. The office as a place for collaboration and face-to-face communication requires an adjusted fit out, incorporating more meeting rooms and breakout space. Enticing office workers back to the office is achieved through offering quality space in the best locations. The various subsectors within the retail sector are at different stages of recovery. Retail warehouses saw very robust performance in 2021, with capital growth almost keeping pace with industrial. Other retail subsectors have not yet seen a significant turn in fate. It is expected that 2022 will begin to see a rebalancing of total returns and more convergence of the main sectors. The social and human cost of achieving success is increasingly considered. Society is holding Governments and corporations accountable for the wider impact of investment decisions. Sustainability is becoming widely and fully embedded into corporate strategy, business models and asset business plans. TCFD is promoting the improvement and increased reporting of climate- related financial information and enabling progress to be measured against science-based targets. Complacency brings increased physical and transitional risks and potentially stranded assets. Measures to reduce the carbon emissions of a property portfolio, lift the EPC profile and improve other sustainability credentials like biodiversity and wellness bring both costs and opportunities to enhance value. Collaboration is key. Engaging with industry stakeholders to share knowledge, data and best practices accelerates progress. Engaging with occupiers on Scope 3 emissions is vital to achieve a meaningful reduction in portfolio emissions and progress along a pathway to net zero. Applying circular economy principles to real estate helps to reduce embodied carbon emissions through extending the lifecycle of a building, promoting repurposing over demolition and reuse of materials over landfill. Remote working, flexible working and reduced business travel are facilitated by the advancement of online communications platforms. Although accelerated by the pandemic, these working patterns will continue in a hybrid model. Flexible workspaces require technology to be marketed and managed, to remain competitive and provide an effective solution for businesses. The UK Government’s agenda to ban sales of new combustion engines by 2030 will shape requirements for electric vehicle charging where we live, work and shop, with implications for buildings, power supply and parking arrangements. A longer-term consideration is the roll out of the 5G network, enabling driverless vehicles. There is a heightened need for data storage and datacentres. Big Data, Artificial Intelligence, Machine Learning and cloud computing are shaping the future of the workforce and the requirements for buildings in which they operate. Bolstering cyber security and secure data storage is high on corporate agendas. For retailers, investment in online platforms and fulfilment is paramount. The proportion of online spending has not reverted to pre-pandemic levels. Longer-term, the increased use of robotics, electric industrial vehicles and drones has the potential to impact the way online orders are fulfilled and industrial property is occupied.

Sustainability and climate change Sustainability, climate change, extreme weather, biodiversity loss and other environmental issues are amongst the largest risks we are facing on a global scale. Time for change is limited and the real estate industry has a significant part to play. There is a need to transition to a low carbon economy. The Government has set a target of bringing all UK greenhouse gas emissions to net zero by 2050. Declaring a pathway to achieving net zero carbon, involving reducing carbon emissions as much as possible and then offsetting any residual emissions, is becoming common corporate practice. The Task Force on Climate-related Financial Disclosures (TCFD) provides a framework for reporting the physical and transition risks to companies associated with climate change and provides transparency to stakeholders. Specific to the property industry, the legislation on minimum energy efficiency standards (MEES) is changing. Landlords must understand the new requirements and adapt where necessary to avoid stranded asset risk. There is growing recognition that the linear economy – take, make, waste; is not sustainable and a more regenerative and restorative economy is needed. Circular economy principles and systems aim to tackle waste and pollution, reuse products and materials and regenerate nature. Technology The digitisation of real estate, increased use of data, advanced analytics and automation are drivers of change in the built environment. The technology trends set to directly impact the property sector in the short to medium-term are wide ranging, from smart building technology, the 5G network, increased adoption of electric vehicles, Artificial Intelligence, robotics, Big Data and cloud computing. Competitiveness in a post-pandemic world will depend on a company’s ability to thrive in the digital environment. The use of analytics to make data-backed decisions provides confidence to investors. Technology plays a significant role in driving positive change towards sustainable buildings during each stage of a building’s life cycle. Technological advances in construction, manufacture of materials, energy usage and circular economy principles are all essential to progress towards a low carbon economy. Property sectors are all uniquely impacted by technological advances in multiple areas, with each facing its own benefits and challenges. Common problems in the industry include a reliance on legacy systems, fragmented software solutions, lack of standardisation and decentralised data platforms.

 Picton Property Income Limited  Annual Report 2022

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