Industrial has risen up the investment ranking but it still pays to be picky
01/04/2023
11 Aug 2020 | by James Havery - Guest Writer
Stock selection remains key even though industrial is top of the league table.
James Havery is co-founder of multi-let industrial specialist Ribston. He set the business up with Mark Ovens and Joe Havery in 2016. In considering a recent prospective acquisition we arrived at a novel concept. If every single UK commercial property had a ranking in one comprehensive league table before COVID, had the subject property moved up the league, stayed in the same position or gone down? This does not mean ‘is it worth, or is its value, more, the same, or less than before?’. That is an entirely different question and separate discussion, but the contemplation provoked good debate.
The property in our case was undeniably promoted in the hypothetical universal league, and materially so. Another industrial property might have moved up the universal rankings to a lesser, or even greater, extent. We landed on the conclusion that probably all industrial property has been rewarded with a higher position than it had before as a function of COVID. However, in our view this does not mean that all industrial properties are a one-way bet nor will they retain their new position in the ‘universal league’.
The ranking hypothesis is an exercise in relativity, and a large or small part of any promotion is also a function of another property’s demotion. For example, as clarity improves around the future role of offices as an investment, in our view driven predominantly by human behaviour eventually presenting itself, then another material re-ranking could take place.
The same could be said for alternatives which, having grown to the extent they are now fully and discretely reported on by MSCI alongside the three traditional sectors, appear to be a little out of favour currently, but may well come back out of the shadows at some stage.
Perhaps this means that some industrial properties, having been swept up the rankings on a sector-wide wave, will ebb back once the world settles down. We will continue to focus on those properties that we believe have the strongest prospects for, in effect, retaining, or further improving, their league position; and our three tests probably fit neatly into that exercise in any event:
1. Is the asset well placed to capture rental growth in a world that is on the up; and
2. Does the asset have sufficient defensive qualities to prove resilient in a world that is not on the up?
3. What are the barriers to a clean, efficient and profitable exit in a full range of future market conditions?
If an asset doesn’t pass these three tests then we don’t want to own it.
Picking winners
We believe we are in the ‘right’ sector. It is evident that an increasing number of investors in the pursuit of resilient income share that view. New entrants continue to arrive in the sector having morphed into industrial specialists. The upshot of this is there are a lot of players on the pitch and competition for stock is high.
Whilst obviously more significant than a simple observation, it does not in itself dramatically concern us. It means we will continue to be as discerning in stock selection as we have been to date. It means we will continue to heavily due diligence assets before arriving at a decision whether or not to pursue. It means we will inevitably continue to dismiss more ideas than we progress, but if something meets our particular requirements we will diligently and aggressively pursue it.
In an ongoing confused world (COVID, Recession and Brexit) the future looks good for industrial property in a relative sense. Picking the winners so they perform in an absolute sense will become increasingly acute for investors if the veil, if that is what it is, of what in recent years has largely been assumed by many as offering close to guaranteed performance, is lifted for industrial property.