Real estate companies have generally benefitted from the fall in short term interest rates and bond yields across nearly all major markets, year to date. As an alternative to corporate bonds, tax efficient real estate investment trusts (REITs) should provide a diversified, inflation proofed income yield. As an alternative to equities, the underlying properties in REITs also provide scope for capital growth.

As with the broader equity market, the performance of REITs in recent times has been very different, depending upon the underlying sector. Property companies investing in industrial units or warehouses, for example, have performed very well as direct beneficiaries of the growth in e-commerce. Retail property owners have, on the other hand, performed poorly as a series of high-profile failures in the sector (most recently Thomas Cook in the UK) have left shopping malls with empty units at a time when most retail chains are decreasing their physical presence on the high street.

Somewhere in the middle of all of this are the large office owners whose tenants are typically long term and of good quality. There has, however, been much recent publicity over the growth of the flexible office space company WeWork whose business model of ultra-short tenant agreements, high gearing and trendy coffee-shop style premises have threatened to lure business away from the more conventional model. The rapid growth of WeWork has, however, failed to translate into profits. Quite the opposite, in fact. This, in turn, has led to the postponement of the company listing some of its shares on the stock exchange. The concern is now that the market will face forced selling in prime locations in cities around the world, depressing valuations from their current levels. However, the long term nature of the conventional office business means that the sector should be able to absorb at least some of any selling pressure in the near term whilst the larger REITs will no doubt be eager to pick up fashionably refurbished premises at lower costs and higher yields, if the opportunity arises.

In the near term, we see little prospect of this divergence in the valuation of properties in different sub-sectors changing course. The selling pressure on malls and, in particular, more traditional high street shopping strips shows no signs of abating. Meanwhile, warehouses and other industrial boxes remain popular with tenants, especially when located in prime transportation hubs. This, then, is where the Fund’s focus remains and is likely to stay for the foreseeable future.