Anthony Hilton: In the internet age, the future is in sheds

Commercial property is an unusual investment. At a primary level the investor is taking a view on how competent management is to make money in the business, whether that be development or as a landlord.

But regardless of individual competences, property is also a bet on the overall health of the economy and whether or not there will be enough money around to rent all the new fancy buildings.

Third, it is an asset class in its own right. Interest in property company shares — and the underlying buildings — can increase or decrease because the world’s asset managers do or do not prefer bricks and mortar to the obvious alternatives. They may think for example that buildings offer a less volatile return than shares and better risk-adjusted returns than fixed-interest bonds, in which case property should trend upwards. When they take the opposite view valuations weaken.

There is enough there to make property investment challenging — which is perhaps why so few are genuinely good at it in the long term, and why rather more of them rely on the rising tide of inflation to lift asset values and erode the levels of debt they would otherwise struggle to repay.

Today, however, property is even harder to get right because of technological change. Huge shifts are underway in how business and the economy work, and these require quite different kinds of buildings. Similarly, much of the bricks and mortar which we assumed would last for ever is now obsolete.

Until a few years ago, for example, the prevailing philosophy at Tesco was to build as many supermarkets as it could get permission for. More expansion was paid for by selling the freeholds of existing stores to investing institutions.

They were happy to buy because Tesco would stay on paying rent and it was hard to think of a more reliable and stable tenant. Such deals seemed to offer a guaranteed return to the investors for years into the future.

But of course no one foresaw how the internet would change the way people shop and, in doing so, fundamentally alter the economics of these sheds. If 15% of Britain’s groceries are now bought online it follows that our existing supermarkets now have 15% too much space. This is why they are either having to close stores or find alternative uses for the space. Rather late in the day, investing institutions have become a lot less keen on retail space — be it in the form of supermarkets, poorly sited retail parks, or shops on once-vibrant High Streets.

As always, however, change also throws up opportunities.

One of the most fascinating spin-offs is the effect this upheaval in shopping habits has had on warehousing and distribution.

The old view was that warehouses should be close to where goods were manufactured or to the docks where they were imported.