A Tale Of Two Sectors

Today, we look at two contrasting sectors with regard to how they are faring in the pandemic crisis. The Property sector and Food Retailing have experienced very different fortunes.

Taking Property first, there is normally a mix of retail, office and commercial property in most company portfolios, although some will specialise. Clearly many of these sub sectors have been affected by Covid-19. Retail has been decimated, even more so with restaurants. Many businesses that have partly or fully sent staff to work from home are now evaluating just how much office floor space that they will need in the future. The real problems have come where tenants have been unable to pay rents when due on the quarter day and the real pressure has fallen on property companies that although they may have quality locations, are burdened with too much debt.

For example, Intu, the owner of Lakeside and the Trafford Centre, has fallen into administration as a result. Travelodge, the budget hotel chain has entered into a Company Voluntary Arrangement which could save it £144m in rent; not the best news for its landlords. Nevertheless, if one is careful and picks the type of tenant that is thriving and choose to invest in the sector through a diversified REIT, then some good and safer yields can be achieved. Warehouse REIT, which has recently raised £153m additional capital to invest has around 35% of its tenants involved in internet-based trading, where volumes have been strong in lockdown, has a yield of 5.8%.

That leads on to a sector that has been favourably affected by Covid-19, that of the Food Retailers. The main businesses here, Tesco, Morrisons and Sainsbury were all designated essential operations and so did not close. Their on line sales rose strongly and that improved internet content may well continue. With restaurants and pubs closed for a considerable time and now not all open or running at reduced utilisation rates, the food that is normally consumed in the hospitality sector has been channelled through the retail food outlets. Interestingly, the discounters like Aldi and Lidl have probably lost market share in that period, as the big three have better on line offerings.The Food Retailers have also had a major saving due to the waiving of business rates.

Tesco and Sainsbury combined would have a full saving approaching £1.25m.

In fact, there has been some controversy about the correctness of that benefit, but the food giants are keen to stress the considerable costs that have needed to be incurred with social distancing, additional staff and the incremental support for on line sales.

For those controversial reasons, we may not see dividends that reflect the benefits one might assume. Nevertheless, they will emerge from the pandemic stronger than before and with enhanced on line demand and capabilities.

Barrie Newton