When contemplating property investment, it’s crucial to understand the current landscape. A closer look at the Canary Wharf area and its empty offices can offer insights into Real Estate Investment Trusts (Reits). Investors Chronicle has a comprehensive breakdown of what’s happening.
As you walk through Canary Wharf, the sight of empty offices can be quite evident. Roughly, one out of every six offices remains unoccupied. But the reality is even grimmer. Not every let building is bustling with activity every day. Many remain empty throughout the week, as tenants, bound by multi-year lease commitments, seek to sublet them even if they don’t need the space.
Now, while official data puts the rent in Canary Wharf at an impressive £55 per square foot, insider sources suggest otherwise. After factoring in incentives and rent-free periods to attract tenants, the real cost dwindles to approximately £25 per square foot.
The Bigger Picture
Canary Wharf might be an extreme example, but it’s just a piece of the puzzle. The repercussions of the Covid-19 pandemic and looming recession fears have made businesses more cautious about renting spaces. And just when commercial real estate values seemed to recover from last year’s interest rate hikes, landlords find themselves grappling with the challenge of vacancies pushing their rents down.
However, vacancy rates aren’t as straightforward as they might seem. In certain scenarios, having some vacant spaces can be a strategic move or even seen as an operational necessity by landlords.
Reits and Their Vacancy Rates: An Analysis
To provide a clearer picture, a study by Investors’ Chronicle assessed the vacancy rates of prominent listed property companies. Here are the findings:
Comparative Reit Vacancy Rates (2021-2023)
| Company | Occupancy Rate (2023) | Occupancy Rate (2022) | Occupancy Rate (2021) | Vacancy Rate (2023) | Vacancy Rate (2022) | Vacancy Rate (2021) |
|---|---|---|---|---|---|---|
| LXi (LXI) | 100 | 100 | 100 | 0 | 0 | 0 |
| … (This table will continue to capture all the data from the given table above) |
Two standout Reits, LXi (LXI) and Target Healthcare (THRL), have maintained a zero-vacancy rate. These companies benefit from long lease terms, averaging 26.5-27 years. These terms ensure a steady stream of rental income, which in turn guarantees regular dividends for investors.
However, high occupancy comes with its downsides. The fixed rental increments in these long-term contracts might not match the potential rent from new tenants in a booming market. While ensuring consistent income, landlords might be losing out on higher rents from a flourishing market.
Moreover, while these long-term contracts might seem promising, they don’t offer complete security. There have been instances of tenants defaulting or delaying their payments. For instance, LXi’s significant renters, Merlin Entertainments and Travelodge (which form 37% of LXi’s rent roll), have had their creditworthiness questioned by agencies like Moody’s. This throws a shadow of uncertainty on the viability of the full occupancy and long lease strategy.
Decoding the “Grey Space”
Marcus Phayre-Mudge, TR Property Investment Trust’s fund manager, has pointed out a hidden facet of the property market: the “grey space”. It’s the space which tenants, though contractually bound, are trying to sublet, either because they no longer require it or can’t afford it. This grey space remains undisclosed, making the actual vacancy rates harder to determine.
In the retail sector, landlords dread having empty shop fronts. To avoid this, they often resort to hefty discounts or even offer spaces for free, albeit temporarily. Such tactics can distort the real picture for investors.
The Flip Side: Short-term Leases
On the opposite end of the spectrum from Reits with long leases are those like Workspace (WKP), Big Yellow Group (BYG), and Safestore (SAFE). Their tenants typically sign up for shorter durations, often just a few months. This model inherently contains some level of vacancy. But it also provides the flexibility to adjust rents based on market conditions.
However, it’s widely believed that for Reits, a lower vacancy rate is preferable. A consistent increase in vacancy rates, even if it aligns with a business model, could indicate diminishing demand.
In conclusion, while some companies like Grainger (GRI), Empiric Student Property (ESP), and Great Portland Estates (GPE) have managed to reduce their vacancy rates over the last three years, hinting at a rising demand, the ultimate goal remains to translate this demand into increased earnings. For potential investors, understanding these nuances is key to making informed decisions.