Retail vacancies & property funds

The British Retail Consortium is reporting that more than one in ten retail units were vacant as at the end of May.

The average retail vacancy rate across the UK was 11.2%.

Regional variations in the health of the High Street economy means that Northern Ireland had the worst retail vacancy rate, at 17.1%.

Footfall (the number of shoppers) was also lower in July compared to the previous year. It was 1% lower on average, although London experienced a 1.6% increase in footfall in July.

What do these retail vacancies and regional variations mean for commercial property funds?

Property funds tend to allocate their portfolios across retail, office and industrial units. They also tend to be reasonably well diversified in geographical terms.

This means that empty High Street units is likely to have a negative impact on the value of retail holdings in property funds. It is also likely to reduce the rental yield available from this part of property portfolios.

However, this is likely to have a minimal impact in the overall scheme of things.

With good geographical diversification and a spread of assets including exposure to office and industrial units, the negative impact from retail holdings in property funds should be reduced.

Perhaps the most important reason for holding a commercial property fund in a well diversified investment portfolio is the way in which it tends to behave compared to other investment assets.

This ‘negative correlation’ is particularly important when other investment asset classes are volatile. Having an asset class, such as commercial property, which behaves differently to the other investments can reduce overall levels of risk in a portfolio.

This remains the case even if the prospect for total returns (capital growth and rental yields) from the commercial property sector is less than positive.

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