Ainslie McLennan, Co-Manager of the Janus Henderson UK Property PAIF, summarises the investment market, highlighting that the easing of lockdown restrictions has enabled some market transactions to progress and provide signs of valuation evidence.

    Key takeaways

• As a result of COVID-19 the independent valuer for the Janus Henderson UK Property PAIF, CBRE, applied a material market uncertainty clause to the fund valuation on 17 March 2020 and, in line with new rules from the Financial Conduct Authority, the decision was taken to temporarily suspend dealing in the fund and its associated feeder fund to protect the interests of all investors.
• CBRE (and some other fund valuers) removed the material uncertainty clause from certain types of long income assets as at 30 April 2020, which have tenants paying rent on long lease agreements (over 20 years).
• The fund’s investment team continues to implement asset management activities and support tenants through this challenging time rather than have lots of vacant properties when the crisis is over.

Video summary

Hi. This is Ainslie McLennan on the 18th of May 2020 giving an update on the Janus Henderson UK Property PAIF.

Investment market

I’m going to start with the investment market and talk about what we have been seeing there. We have seen transaction activity in the market for larger lot sizes or more ‘trophy’ style assets. There is still a lack of valuation evidence coming through, even in markets that you would think were more liquid (easier to buy and sell). That lack of valuation evidence is typically in the small to medium lot sizes. Within it, unsurprisingly, business space (industrial and office-based assets) has probably been transacted more than anything in the retail sphere.

Within our own portfolio we have still seen demand for assets across all sectors and are under offer on some sales. As a result of the sort of changes and easing of restrictions that have been coming through on lockdown, this has facilitated surveys taking place on buildings. That has been great from our perspective. We have seen some surveys take place on assets that have been under offer to sell. Previously, there was an inability for prospective purchasers to look round assets. The fact that building surveys and viewings can now take place should help the UK commercial property market to function, albeit slowly, and move forward.

Key areas impacted by the lockdown

The area that has probably been most affected by this whole situation has been leisure. Obviously, many areas of retail have too, but particularly leisure. This is still seen as a very vulnerable area of the market and has been where we have probably been most tested in terms of rent collection. Our rent collection overall has been relatively steady, but leisure has been an area where we are seeing some of the more frequent deferments coming through for rent. As we go through the year and the coronavirus situation unfolds and the country gradually unwinds from lockdown, we are still expecting the leisure-based area of the market to remain vulnerable for some time.

Uncertainty clause still on most valuations

As at 30 April 2020, CBRE (and other fund valuation houses) removed the material uncertainty clause from certain types of long income assets, which have tenants paying rent on long lease agreements (over 20 years). Resultantly, the following three long income supermarket assets held by the fund are no longer impacted by the uncertainty clause: Tesco in Hythe, Lidl in High Wycombe and Sainsbury’s in Ripley, Derbyshire. This equates to around 4% of the fund’s value as at 30 April 2020* that has been removed from the uncertainty clause, the broader clause that is being applied across everything else.

The valuers have as of last week removed the valuation uncertainty clause from primary healthcare. That doesn’t include care homes and it is not something that we own in the fund. It is, however, interesting for you to know and they have also removed it from ground leases. Again, not something we have in the fund but important to you to be aware of in terms of the valuation process that the valuers are going through, removing the uncertainty clause sector by sector as they see transaction and subsequently valuation evidence come through. I think we feel that we may ourselves be creating some of the valuation evidence that will come through in some of the sectors. This will need to unwind further from the uncertainty clause in the near future. Hopefully, that is helpful for you to be aware of.

Asset management activity

In terms of day-to-day activity in the fund, we are implementing quite a bit of asset management. This can include refurbishment work to improve valuations and attract a better quality of tenant, changing the planning use of assets to increase rental revenue, or renegotiating existing leases to extend tenancies. There had been a bit of a lull over the first two weeks of going into lockdown. However, some asset management deals did happen as of the end of April. We saw quite a bit more under offer for legal approvals during May, which is positioned mainly within the business space, such as industrials and offices. However, there has been asset management activity for some of our retail assets as well. We believe that quite a lot of the retail we own is at the better end of the scale in terms of asset allocation and style. So hopefully that should serve investors well over the foreseeable future.

These are the main things that I thought would be helpful for you to be updated on. As ever, I will give another update if we feel there is something useful for you to be aware of.

Thanks for your time.

*Source: Nuveen Real Estate