Picton Property Income Limited Annual Report 2022

Our Marketplace continued

Throughout the year, structural changes that were accelerated by the pandemic continued to create a divergence in performance between property sectors. The industrial sector has benefitted from the increase in online consumer spending to the detriment of traditional retail, whilst enforced working from home during the pandemic is likely to lead to a longer-term shift towards a more hybrid model of home and office-based working.

Industrial market trends

The 12 months to March 2022 was a record-breaking year for the industrial sector, which saw capital values increase by 35.9% – the highest annual growth recorded for any sector across any year in the MSCI UK Quarterly Property Index. Annual rental growth was also a record for the sector at 11.2%, significantly higher than the 12-month CPI inflation rate of 7.0% for the same period. The industrial sector has witnessed exceptional levels of take-up for the last two years as it continues to benefit from the accelerated shift to online spending, as well as global supply chain disruptions which have created a need for greater stock holding to maintain supply chain resilience. On the supply side, development has struggled to keep pace with demand, with the rising cost of materials and labour shortages increasing lead times and in turn supporting rental growth. However, now more closely tied to levels of consumer spending, like the retail sector, industrial may also be adversely impacted if activity falls because of persistently high levels of inflation. Industrial occupiers are also faced with rising fuel and energy prices coupled with increasing rents and the impending business rates revaluation in 2023, potentially putting pressure on profit margins. The sector is experiencing strong investor demand which has driven down yields. For the year to March 2022, the industrial sector accounted for 27% of total investment volumes at a value of £19.2 billion. Standard industrial units, particularly in London and the South East are forecast to outperform the All Property average. What this means for Picton ‒ We are primarily invested in multi-let industrial assets, for which there continues to be healthy demand across a wide range of occupiers. The portfolio remains well positioned with limited exposure to large and online driven distribution units. ‒ Our occupier focused approach has enabled us to capitalise on strong demand for industrial property and grow ERVs through new lettings, renewals and rent reviews. Our response to these trends ‒ We will continue to capture rental growth through new lettings and proactive portfolio management. ‒ We will strategically maintain our overweight position to the sector. ‒ We will continue to acquire complementary assets where possible, whilst remaining selective given the increase in pricing. ‒ We envisage only limited and selective disposals.