For those of us that have been in property long enough to remember other downturns in the economy (I’m now up to 3 – a sobering thought!) you will know that each one is different – especially with the regards to the sectors that are hardest hit. 

The market’s reaction to COVID, is no exception.  The market bounces around depending on whether we are in or out of lockdown and it’s really too early to tell whether all this turmoil will result in a true economic recession. But it’s pretty clear that there are some sectors of commercial property that won’t ever look and feel the same again.

It’s no secret that retail has been the hardest hit. In fact, it was always going to be the hardest hit because trends were moving against the type of bricks and mortar retail that occupied our high streets pre COVID.  There were a huge number of brands and businesses who hadn’t innovated or evolved for years, and whose existence was wholly reliant on the High Street being propped up by consumer spending and a buoyant economy.

For other sectors, such as hotels and leisure it’s really too early to say but I suspect that there will be a post-lockdown spending bounce back, especially in the leisure market. We’ve all missed social interaction and will be looking to get that in bucketloads once we are released!  And as for offices, I suspect they will most definitely continue to exist but, for some businesses, just not in the shape and form that they were previously. I expect to see the rise of suburban flexible office hubs, downsized head offices and some rationalisation of portfolios.

Of course, some of the current trends are benefiting some sectors of property – parts of the industrial sector, in particular, have strengthened – especially logistics for obvious reasons.

Across the whole commercial property market, however, we are seeing tenants starting to demand more flexible leases and, in some sectors, even different type of rents, such as turnover rents in retail.  All of which will necessitate a closer relationship between landlords and tenants into the medium term. 

Let’s be clear though, a lot of the current trends were going to happen anyway – just not yet.  As Karl Marx famously declared “There are decades where nothing happens and there are weeks where decades happens”.  This couldn’t be truer than what is happening at present!

This is the first market that I have seen where every sector is responding differently to a unique and generationally defining set of circumstances. The world is moving at a fast pace, trends have been accelerated and exacerbated, and out of this period there will be winners and losers.  Importantly, however, it’s also dangerous to generalise – not all retail will fail, not everyone will close their offices and not all industrial will ride the wave.

In such turbulent times, as an investor, it is challenging to be a jack of all trades and master of none. The winners in this market will be those that drill into the trends, read the market and ‘know their onions’. So how do you do this in 2021, especially if you are relatively new to commercial property investing?  The answer is to ‘niche’ your investment strategy.

The definition of a niche in the Cambridge English dictionary is “an opportunity for a business to offer a product or service that is not offered by other businesses”.  In these uncertain times you don’t want to be fighting in crowded oceans for mean pickings. It will be essential to have some clear blue water to yourself in order to become THE expert in the area or the sector in which you are investing. 

Niching will provide absolute clarity on your business model, a clear idea of the supply and demand in your chosen market, and knowledge of the rents and lease terms you can obtain.  This will enable you to “sniff out” profitable opportunities in order to increase your competitive advantage.

In this market, and in the coming months and years, it’s going to be important to read the trends, to ascertain where the opportunities lie and ultimately where there is money to be made.  It is in times of change where people make or lose their money, so make sure you do the former!

So how do you niche your investment strategy? 

Niching could mean finding a subset of the market where there are few competitors, or targeting a market where there is a particularly high demand for space.  It could entail forming a relationship with a particular occupier, who are actively acquiring property, or targeting a particular type of property in which you have become the expert. But most importantly it will involve finding an area of great need which isn’t currently being satisfied and nurturing relationships with occupiers, agents and vendors to make sure that you maximise these opportunities.  

So, what could a niched property strategy look like in the current market? Perhaps you become an expert in one of the new permitted development rights?  What about specialising in property provision for the health sector? Health is currently the number one priority for both the economy and the population and it’s logical that this is going to continue post pandemic. What about the sub-sectors of industrial that are benefiting from the current trends? Logistics (from the rise of online shopping), cold storage (due to the massive requirement to store vaccines & fresh food), data centres (to cater for remote working and online operations). What about offices? I’m anticipating the rise of the suburban flexible office hub – are you positioned to exploit that trend? And don’t forget retail. How about investing in local shops to take advantage of more people working from home post pandemic?

No one knows this better than pension funds, investment companies and REITS. Traditionally they have focused their real estate investment into the three main sectors –  retail, office and industrial.  Some funds further diversified into purpose build student accommodation (PBSA), and build to rent, and fewer still had ‘alt funds’ where they invested in emerging ‘alternative sectors’ 

With recent market events there has been a stampede away from retail and, in the search for a safer haven for their money, many funds have moved their allocations into logistics.  Over the longer term, however, they will be keen to weather any future storms by having more diversified portfolios and this means they will be looking carefully at emerging trends and the market niches that emerge.   As a result of this, in the future, we can expect more types of property to become ‘institutionally acceptable’.

In order to simplify the formulation of your niched commercial property strategy, I have developed a model – which I have called the Four R’s”

The Four R’s in this model are:

• Research 
• Requirements 
• Routes and 
• Returns. 

The first R – Research – is about ensuring you’ve done all your research prior to investing.  This will, initially, involve examining market trends in order to find potential investing opportunities, followed by drilling down into one or two specific niches.  Once you have done that, area-specific research will be required, particularly into socio economics, local vacancy rates, the planning regime, occupier requirements, and comparable evidence to ascertain the achievable values, rents and lease terms. You will also need to research your exits prior to investing – whether you want to refinance or sell.  The importance of this phase can’t be underestimated and will be the key to unlocking your niche.

Requirements is about becoming the expert in the supply and demand in your market niche and satisfying yourself that there is enough weight of demand to make your strategy profitable.   It should also involve nurturing great relationships with both agents and occupiers to facilitate your asset management, which will also help you to pre-let to tenants as far as possible.  

Routes effectively means looking for creative ways to purchase – such as options and delayed completion, so that you can achieve income on your purchase from day one. Routes also means early on having formulated multiple exit plans – a very prudent strategy in the current market.

Returns, obviously, means maximising the returns you can achieve from your investing niche and from your asset management or development.   Make sure you have analysed your deals adequately and structured your deals properly so that you can recycle your finance, if required.

A fifth ‘R’ – relationships – will be key in order to facilitate all the other R’s.  

We are in uncertain times, but out of uncertainty comes opportunities. The unique market conditions set up by the pandemic (and Brexit) is opening up a new niches in the market and will continue to do so.  Smart investors will take full advantage of this, target the emerging trends, and develop a laser focus in order to differentiate themselves from their competition in order to maximise their returns.