Landlords may be able to breathe a sigh of relief as rent collection becomes more predictable and still has further headroom for growth, according to Richard Shepherd-Cross, who runs wealth manager Mattioli Woods PLC’s listed real estate investment trust Custodian REIT PLC (LSE:CREI).
He explained that while it was historically assumed that rental arrears would be paid, the market has been through a “torrid two years” in which the trust wrote off up to 3% of its rent book.
That trend has now subsided and rent collection has returned to normal, with most unpaid rent being subject to payment plans, according to Shepherd-Cross.
Rising interest rates remain a challenge for landlords, as the cost of 10-year debt has gone from 3% to 4% in the past few months, raising questions over whether private equity will continue to buy into the market when the cost of debt is so high, but “maybe the pessimists won’t have their day”, he said.
“I’m an optimist, I think the economy is in a difficult place but it’s not a basket case,” said Shepherd-Cross. If there’s a return to normal pricing of debt, he anticipates: “There’s going to be contagion.”
Perhaps inflation is the greater concern for landlords, but there doesn’t seem to be an end in sight for rental growth.
“Real estate is often seen as a good hedge against inflation...because our rents should grow over time,” said Shepherd-Cross.
Custodian’s portfolio, about half of which is invested in the industrial sector, experienced “10.5% rental growth” last year, he said.
“The average rent across industrial portfolio is £5.27 a square foot,” said the REIT manager. “If we are going to see new development – rents need to be £7 to £7.5 per square foot because of the cost of construction that has seen inflation land prices. Not until rents get to that level will we are going to see an end to rental growth. I would forecast there is more growth to come.”
He also reported a more recent return to rental growth on the high street, with prime high-street locations seeing growth that could end a four-year cycle of falling rents.
Out of town retail warehousing has meanwhile "been very resilient through the pandemic”, he added.
An undersupply of office space in prime city locations that meets modern environmental standards and offers flexibility could also benefit landlords renting space out to high-street stores.
“You are buying into retail at the bottom of the downswing and start of the recovery,” said Shepherd-Cross.