Strategic Report
Financial Statements
Additional Information
Governance
Retail and Leisure market trends
Office market trends
The success of home working during the pandemic has not led to the mass exodus of office occupiers that was feared by some. Office employees continue to make incremental returns to the workplace and the sector is gaining momentum. If the majority of the workforce is in the office for at least part of the week then significant downsizing is often not viable. According to the MSCI UK Quarterly Property Index, office capital values increased by 3.2% in the year to March 2022 and rents grew by 1.4%. Office take-up has been recovering steadily, particularly in large city centres and central London markets. There is a flight to quality and a shortage of Grade A space, which is supporting rental growth at the top end of the market. In addition, sustainability credentials are becoming increasingly important to office occupiers, where the property element of their operations is accountable for a significant proportion of overall carbon emissions. For the year to March 2022 the office sector accounted for 30% of total investment volumes at a value of £21.2 billion. Central London offices are forecast to perform at around the All Property average whereas provincial and out of town markets rank lower. What this means for Picton ‒ Our offices must continue to provide high quality space in the best locations. ‒ As the office sector continues to gain momentum, we must continue to engage with our occupiers to ensure their needs are met. ‒ We will need to provide more flexible leasing arrangements reflecting current working practices. ‒ We must continue to address the need for sustainable buildings and wellbeing within the office environment. Our response to these trends ‒ We will continue to actively manage the office portfolio and engage with existing and potential occupiers to grow occupancy and income. ‒ We will promote our new flexible office leasing solution, SwiftSpace, where appropriate. ‒ We will continue to upgrade space, focusing on amenities and making improvements in energy efficiency. ‒ Due diligence and research will ensure that the office portfolio is positioned in the most accessible and desirable locations. ‒ We will be increasingly selective when considering office acquisitions.
It has been a polarised year for the retail sector, with retail warehouses at a different stage of recovery to other subsectors. High streets and shopping centres are still faced with a demand/supply imbalance and are not forecast to see positive rental growth in the short- term. The vacancy rate of retail warehouses is much lower and rental decline has started to flatten out. According to the MSCI UK Quarterly Property Index, retail capital values increased by 8.9% in the year to March 2022 and rents fell by -2.0%. However, drilling down into the retail warehouse subsector, here capital values increased by 22.4%. Rents fell, albeit by a lower amount of -0.3%. Retail occupiers are likely to bear the brunt of a reduction in consumer spending as a result of cost of living increases. Retail sales began to recover in early 2022 but have since experienced a drop in volumes. The step change in the percentage of retail sales occurring online has declined from its early pandemic peak but not fully reverted to 2019 levels. On a positive note, the wave of CVAs that have been so prevalent over the last few years seems to have receded. Given the level of price and rental value correction that has occurred across the retail sector, for investors searching for income, high yielding retail assets in selective locations are looking more attractive. For the year to March 2022 the retail sector accounted for only 12% of total investment volumes at a value of £8.3 billion. Of this, 44% of investment activity was for retail warehouses, where there has been increasingly strong investor sentiment.
What this means for Picton ‒ Our occupier focused approach has enabled us to proactively manage our retail and leisure portfolio to maximise occupancy. ‒ Where appropriate we have been able to reposition retail space through change of use refurbishments.
Our response to these trends ‒ With revised pricing, we are cautiously optimistic with regard to acquisitions in selective retail subsectors and locations. ‒ With healthy demand for retail warehouse space, we will strive to maintain occupancy and grow rents in this subsector.
Picton Property Income Limited Annual Report 2022
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