Cordatus Economic and Market Commentary Q1 – April 2019

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Brexit News

Despite writing this report in mid May, fully six weeks after Britain’s original date for leaving the EU, we are no further forward to knowing what form the exit will take, when it will occur, or indeed, whether it will happen at all. Prime Minister May brought her own version of the exit strategy to the House of Commons three times, suffering heavy, if falling, magnitudes of defeat while members of parliament, in an unusual move, themselves brought eight different versions of ways forward – ranging from retaining the customs union, to a no-deal solution to a further referendum – all without success. As the EU (and many frustrated voters) have said; we know what you don’t want, now tells what you do want.

The latest plan, to seek some compromise solution with the Labour party, so far does not seem either to be coming up with the goods, but this long running soap opera has a possible further five months to run, with the EU having agreed a potential delay to the end of October. It is not clear whether any progress can be made in that timeframe.

Meanwhile, the government has reluctantly accepted that the UK will have to take part in the European elections at a cost of £150m – one of many ‘one-off’ costs that the country is having to bear because of the current impasse.

Global Economy

The global economy suffered a distinct slowdown in the second half of 2018 and this feature continues to negatively impact activity this year. The state managed decline in China’s activity, where growth is forecast to dip to 6.3% this year and to 6.1% next year, is one of the key reasons for this slowdown, but the on-going trade tensions between the US and China are also not helping.

These trade tensions, together with continuing uncertainties over Brexit, are hitting business confidence. That, coupled with a slowing export market, is affecting global trade, particularly hampering export-focussing countries.

At a global level, the slowdown that has been evident for the last nine months or so is likely to trough in the middle of this year, with a gentle uptick thereafter. This improvement is predicated on some policy stimulus in China, the ending of some particular negative factors in Europe and a stabilising of conditions in some of the distressed emerging market countries such as Argentina and Turkey. Within the advanced economies, however, there is little positive momentum to note as activity is likely to gradually slow as the impact of the US fiscal stimulus fades.

Our global growth forecasts have been trimmed by 20 basis points to 3.3% for 2019 but are maintained at 3.6% for next year. The forecasts for the advanced economies, in aggregate, have also been cut by 20 bps to 1.8% this year and are maintained at an anaemic 1.7% for 2020.

We have not altered our view that the balance of risks is tilted to the downside. The key global trade issue remains the on-going trade talks between China and the US. The latter’s decision to impose higher tariffs on specific imports from China – up from 10% to 25% – is likely to prompt retaliation. Resolution of the trade tensions would give a fillip to global growth, but further escalation of these tensions and the accompanying increase in policy uncertainty would have the opposite effect. On balance, we are concerned that there still remains the distinct possibility that there will be a sharp deterioration in market conditions.

The EU Economy

The Eurozone has borne the brunt of the heaviest downgrades over the last three months. The single currency bloc has not been immune from the global slowdown but it has also been subject to some significant country issues which have combined to lower the zone’s anticipated output. Forecast growth in the Eurozone, in aggregate, has been trimmed from an already weak 1.6% for this year and 1.7% for 2020 to 1.3% and 1.5% respectively.

Germany and Italy have been particularly badly affected – the former on account of its export-oriented stance and the slowdown in the automotive industry: the latter on account of rising bond yields and the resultant impact on the cost of the country’s huge sovereign debt mountain. Our forecasts for both countries have been cut by 50 bps this year to a less than impressive 0.8% and 0.1% respectively. Even this year’s forecast may be too optimistic as the German government expects growth of only 0.5%. The March PMI reading for Germany showed a worrying fall to levels not seen since the midst of the euro area sovereign debt crisis. Forecasts for France, too, have been reduced from 1.5% to 1.3% for this year. France and Germany have also suffered a 20 bp downgrade to 1.4% for 2020.

Growth for the Eurozone as a whole in Q1 came in a little stronger than anticipated, at 0.4%, double that of the previous quarter. There were encouraging signs for the ‘big-4’ Eurozone economies where growth was higher than expected. However, this relatively positive showing is not expected to continue over the rest of the year. Italy’s economy returned to growth after two quarters of contraction, but questions still remain over the country’s medium term outlook.

Perhaps the most encouraging sign for the Eurozone is the fall in unemployment. The rate of 7.7% is the lowest since 2008, before the onset of the global financial crash and down from 8.5% in the last 12 months.    

The UK Economy

Given the negative effect that the tortuous negotiations followed by the House of Commons impasse in agreeing to any form of Brexit is having, it is understandable that British business finds the prospect of a further period of parliamentary negotiation particularly frustrating.

It remains commendable that the UK economy has remained so resilient over the last year or so, with so many questions still unanswered, especially regarding how trade will fare after Brexit. The latest IMF forecasts for the UK show a reduction from those published three month ago, but at a time when virtually all countries have suffered downgrades. For the UK activity to be broadly expanding over the next two years at the same rate as the Eurozone says as much about the UK’s resilience as the EU’s inherent economic ailments.

The UK economy rebounded in the first three months of the year, posting quarterly growth of 0.5%, significantly better than the lacklustre 0.2% seen the previous quarter. Despite this better than recent levels of growth, much of the activity was accounted for by stockpiling ahead of the UK’s original exit from the EU. The Office for National Statistics reported that “manufacturers were clearing their order books before the planned departure date”. That helped the manufacturing side of the economy to grow in Q1 at its fastest pace since 1988. While it is unlikely that this level of activity will be sustained over the rest of the year, as stocks are likely to be run down, evidence supports the belief that household consumption growth is remaining “solid” and crucially, business investment did not fall “for the first time in four quarters.”

Our forecasts for the UK for this year and next have been trimmed by 30 bps and 20 bps respectively, to 1.2% and 1.4% from those of the previous quarter, reflecting the weaker global trade position as well as Brexit-induced uncertainties. An outcome of 1.2% this year would be the lowest annual growth in a decade. These forecasts, however, are predicated on an orderly exit from the EU. Exiting without a deal, or by some other chaotic way would likely damage the economy over the short term, with consequent downgrades to the above figures.

The downside to these strong manufacturing numbers is the sharp rise in the trade deficit brought about by higher imports ahead of any possible trade sanctions on a no-deal exit. The trade deficit doubled to £18bn in the quarter, a figure which increases to an eye-watering £43bn – a record – at the trade in goods (not services) level.

Market Commentary

According to the latest, Q1 2019, MSCI Quarterly Index, capital values for the market as a whole posted a three-month fall of 0.75%. The trend in capital values has now been declining for five successive quarters, and Q1 was the second quarterly fall in a row. Capital values in the hard pressed retail sector once again contributed most to the down rating, although value declines there (2.6%) were not as bad as the previous quarter’s 2.8%. There was minimal change in all office values in the quarter, the main feature being a 0.2% fall in average city offices, the first decline there for three years. The recent outperformance by the industrial sector continued but here, too, capital growth in the quarter fell to a three year low.

Overall quarterly total returns for the market fell to 0.38% with the albeit slowing industrial sector delivering 1.7% (barely half that of Q4 2018), offices 1.1% and retail -1.3%.

Our reports in recent quarters have highlighted the problems retailers are encountering in the high street and in the retail market generally. The above MSCI figures are witness to the fundamental re-pricing of retail assets that has been underway for some time and is likely to continue for several more quarters yet. Two separate but linked reports show just what pressure landlords are having – one from PWC showing that the number of new shop openings fell to the lowest on record last year and the annual results from one of the UK’s largest shopping centre owners, INTU, which revealed that like for like rents were 6% lower than a year ago and vacancy rates had increased by 1.1 percentage points in the quarter to 4.4%.

The PwC report, which was compiled by the Local Data Company, highlighted that in 2018, an average of 16 shops a day closed across the top 500 high streets in the UK. Compounding that loss was the fact that an average of only nine shops a day opened, leading to the largest ever net annual decline of 2,400 shops last year. Data shows that while the number of shops closing has remained relatively constant over the last six years – averaging 5,700 each year – the number of new shop openings has steadily declined over that period – from 5,662 in 2013 to 3,372 last year.

While capital values have been declining in the retail sector for some time, the concern now is that capital growth in the office and industrial sectors, where the rate of growth has been slowing for over a year, turns negative. Such a scenario is already factored in to the share prices of many listed property companies and real estate investment trusts. Although take up and investment has remained fairly resilient, any such widespread value declines could have a significant detrimental impact on the current positive sentiment that the commercial property market is enjoying.

Central London Offices

The City and West End office markets experienced contrasting fortunes in the first quarter of 2019. While the City market recorded a particularly strong quarter in terms of investment turnover, Q1 take up was the weakest for six years. The West End was a mirror image with Q1 investment weak but take up very strong.

Despite these mixed results, it is fair to say that both investment and occupier markets are performing much better than could have been expected given the hiatus over Brexit and the ensuing economic policy vacuum.

Although City investment increased by over 50% versus the equivalent quarter of 2018, to £1.69bn, two thirds of that total was accounted for by the purchase by the occupier of Citigroup’s Canada Square office for £1.1bn. That aside, both the number and size of transactions is were down in the quarter. Citigroup’s purchase was no doubt a decision made in the light of changing accounting regulations which came in force this January.

By contrast, the West End had its quietest first quarter in terms of transactions for 10 years with a total of only £900m which was down roughly 25% on the same quarter last year.

In terms of occupier take up in Q1, both markets recorded similar figures of 1.2m sq ft. That represented a 20% fall in City take up from 2018, but was the highest first quarter take up in the West End for six years and 30% above the long term average. What was consistent across both markets was the small size of the average letting – 11,400 sq ft in the City and 12,200 sq ft in the West End.

According to MSCI’s Quarterly Index, average capital values continued to grow, albeit slowly, in the West End. Q1’s average growth of 0.23% brought the running 12 month capital growth to 3.9%. By contrast, average City offices slipped 0.19% in Q1 – the first fall there in values since 2016 – although growth in the last 12 months remained positive at 2.3%. The trend in both sub markets, however, is distinctly downwards.

Savills’ prime yields ticked in both market over the quarter. That in the City moved up to 4.25% while that in the West End increased to 3.75%. The 50 bp differential is the smallest in three years after narrowing from 75 bps.

All investment and take up statistics from Savills, all performance statistics from MSCI

Research Author: Stewart Cowe 13/05/2019


Property Week Press Article

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Trade Brands Buck Retail Slump
By Nick Hughes Thu 11 April 2019


When Cordatus Property Trust paid £3m to acquire a Selco Trade Centre unit in Wythenshawe, Manchester, in March, it was yet another signal of the long-term confidence investors have in the prospects for the trade counters market.

Investor appetite: Cordatus recently acquired this Selco Trade Centre unit in Wythenshawe, Manchester, for £3m

While many consumer-facing retailers face a battle to stay in the black in the face of seismic structural shifts in the sector, for those servicing the trade it is a very different story.

Announcing an otherwise disappointing set of full-year results in March, B&Q owner Kingfisher was buoyed by the performance of its Screwfix brand, whose sales shot up by 10% to more than £1.6bn.

With tradespeople continuing to favour visiting a store on their way to a job, experts agree that trade brands are less exposed than other bricks-and-mortar retailers to the threat of ecommerce. “Most [brands] have a multi-channel approach with extended trading hours, improved stock levels, quick ordering and delivery. Our main clients are not being affected by online activity,” says Philip MacLauchlan, managing director at Adept Consultancy, which is the retained agent for Toolstation.

Like Screwfix, other major UK brands such as Toolstation and Howdens Joinery are delivering strong financial results, making the parks they are located on an attractive proposition for investors.

“We still have a reasonable exposure to trade park income, which we are happy with,” says Bill Page, business space research manager at LGIM Real Assets (LGIM RA). “There are long-term structural attributes that support the sector, in particular a trend in the economy for people to pay someone else rather than do it themselves; fragmentation of construction supply chains, meaning more points of purchase; the fundamental long-term need for more housing and infrastructure in this country; and more sadly but importantly, climate change, meaning more mitigation, upkeep and maintenance.”

“There are long-term structural attributes that support the sector” Bill Page, LGIM Real Assets

Despite concerns surrounding Brexit, the positive occupier market has ensured investor demand exists for both solus units and multi-let schemes, according to Charles Howard, partner in the business space investment agency team at Cushman & Wakefield.

“Solus units are often occupied by the larger, more dominant trade operators such as Travis Perkins and Selco, where stronger balance sheets drive investor demand, particularly those with longer leases in dominant or established locations or where few competitors and multiple chimney pots exist,” says Howard.

Meanwhile, multi-let trade counter assets “offer investors similar income risk diversity and a greater opportunity to crystallise rental growth”, he adds.

Value-add initiatives

None of this is to suggest that owning a trade park is a licence to print money. With investment demand strong and yields contracting in line with the wider industrial market, landlords are increasingly looking to boost returns through value-add initiatives.

The main way to achieve capital value growth is through rental growth, explains Montagu Evans partner Steven McDonald. “A good example if a trade park is fully let would be to identify demand and speak to tenants about agreeing to surrender their lease – and look at off-market deals where you can create a higher level of rental value.”

McDonald gives the example of Sydenham industrial estate in London, where occupiers include Howdens and Screwfix and the average rental value from 2016-17 was £13.50/sq ft.

“The estate was fully let but one of the occupiers wanted to relocate to bigger premises. We had the market knowledge that Crown Paints had a requirement for Sydenham, so without having to put the unit on the market, we agreed terms with Crown Paints at £17.50/sq ft.”

Because of its circumstantial nature, tenant engineering via lease surrender and off-market deals will not always be a viable means of increasing income for investors. Page points out that many trade estates that are well let and well managed will be fully rented, in which case there may be limited opportunity to push rents. However, he adds that in certain cases multi-let industrial estates will have opportunities to convert some units to trade counters.

“When you have a void, if you get a trade counter occupier in you often find they are prepared to pay higher rent, particularly where the unit has a good road frontage enabling branding,” says LGIM RA’s Page.

Another way of diversifying and increasing income is by adding new services. McDonald highlights a growing trend for landlords to bring in convenience food brands such as Greggs to trade estates.

“Modern trade parks that are low density will throw up situations where it is possible to build a convenience retail food pod on the site,” he says. “With units ranging from just 1,500 sq ft to 1,800 sq ft, it’s a way for landlords to achieve more rental income and to provide typical trade customers, as well as members of the public, with an attractive service.”

Critical mass

Greggs, McDonald’s, Costa, Starbucks and Subway are brands that are regularly represented.“It makes sense for these brands because trade parks, and often the wider industrial and business parks, create their own catchment and customer base, making these operations highly justifiable from a sequential test point of view,” says Alfred Bartlett, head of the retail and leisure group at Rapleys.

Bartlett stresses the importance of getting a critical mass of trade brands in place before you can pull in other operators to make the site a destination. “The drive-thru or other food-to-go is often the icing on the cake and the likes of Subway et al will also judge the location not only on the trade park custom base, but on the transient trade that the prominent location affords.”

With trade rents typically top of the market in terms of the industrial sector, it is no surprise investors are sweet on trade counters. In addition to its purchase of the Selco unit in Manchester, Cordatus Property Trust recently acquired the Mercor portfolio of 33 Travis Perkins trade counter units for £45.4m.

At the time, the trust’s director Michael Cunningham said the acquisition offered “very attractive, long-term value” and provided “an opportunity for us to deploy our specialist skills to manage, re-gear and potentially redevelop the assets in line with our strategy of delivering an attractive income return to our investors with potential for capital growth”.

Six months on, Cunningham remains buoyant about the prospects for the trade counters sector. “We feel trade counters have the potential to benefit from the continued rental growth forecast in the wider UK industrial market,” he says, adding that in the longer term, Cordatus sees the opportunity to redevelop some sites for alternative uses and increase building density at others.

For landlords, sweating their existing trade counter assets is becoming increasingly important given the current imbalance between supply and demand, as McDonald explains. “Fundamentally, there remains a shortage of good-quality stock,” he says. “There tends to be a focus on London but the reality is it’s much the same throughout the UK. There’s still a shortage of new-builds and modern stock, so the overall vacancy position is very low.”

In the Greater London area in particular, a shortage of industrial space is forcing trade counter operators into competition with other industrial and retail occupiers.

“I deal with an estate in Bermondsey and the trade occupiers there are competing with fresh food suppliers who are looking for that last-mile delivery to central London,” says McDonald, who notes that businesses supplying to restaurants in central London can pass on price increases more readily than trade brands that have to be mindful of their national pricing policies.

The national shortage of stock comes at a time when the largest trade brands are actively seeking to open new outlets. Screwfix has added nearly 300 UK outlets over the past five years and has increased its target for total UK stores from 700 to 800 in 2019.

Rival Toolstation opened 40 new branches in 2018, taking its total to more than 300, and MacLauchlan notes it has a current requirement for small-format trade counters of 2,700 sq ft-plus and standard trade counters of 3,800 to 6,000 sq ft. Howdens, meanwhile, sees the opportunity for around 850 UK depots, up from the 694 operating at the end of 2018.

Acquisitive occupiers – coupled with a shortage of traditional stock – have meant that, in London in particular, some trade operators have sought to take advantage of the increasing amount of vacant high street retail units. “Brands like Screwfix are acquiring retail premises and high street units and tapping into the growth of the online retail market with a view to expanding their click and collect services, almost along an Argos-style model,” says Rapleys’ Bartlett.

Toolstation is also hunting for high street sites of between 4,000 sq ft and 5,000 sq ft, according to MacLauchlan.

Occupiers that find the right location are often prepared to pay a premium for it and take a longer-term lease. “Although it remains the case that a 10-year term with a break at five is still the most common, as supply continues to reduce and demand holds up, we are definitely seeing more instances of straight 10-year leases and there are occupiers now that will take 15 with a break of 10,” says McDonald.

Income security

This kind of long-term security of income from national operators with a strong covenant only serves to strengthen the appeal of the sector for investors.

“We continue to like long-dated income with fixed uplifts,” says Cordatus Property Trust’s Cunningham. “We have a couple of hotels in the portfolio that deliver these characteristics, as well as our trade counter assets, and we would look to add assets that can deliver this if pricing is sensible.”

Page says LGIM is similarly happy with its exposure to a sector whose prospects appear bright. “If you look at the likes of Travis Perkins, where they have been doing less well is on the more consumer-facing side and where they continue to do well is in the trade-focused side of the business. Their results are confirming our positive view of the trade sector.”

Looking further ahead, trade schemes may become more of a destination for customers in a similar way as shopping centres have adapted their offer, according to Harry Gibson, senior surveyor in the London and South East industrial agency team at Cushman & Wakefield.

“Trade counter operators will evolve to consumer demand but the landlord will also have to evolve, with a focus on improving their schemes to keep them modern and an attractive location for occupiers and their customers.”

For many landlords, this evolution has already begun.


Ben Copithorne
Corporate and B2B Communications
T: +44 (0) 207 636 7366


Cordatus Acquires SELCO Trade Centre, Wythenshawe in £3m Deal

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Latest Acquisition for Cordatus Property Trust


LONDON, 12 March 2019 – Cordatus Property Trust (“CPT”) has acquired a Selco Trade Centre unit in a prime location in Wythenshawe, Manchester, as its latest addition to the fund.

The Cordatus Property Trust is a programmatic venture between CBRE Global Investment Partners (CBRE GIP) and Cordatus Real Estate (Cordatus).

Cordatus purchased the unit on Timpson Road, Wythenshawe, from IGP Investments Ltd for £3,000,000. The price reflects a net initial yield of approximately 6.9%.

In line with its development of a ‘best ideas’ portfolio spanning across the UK, Cordatus has acquired the long leasehold on the Wythenshawe site which is let to Selco with nearly 8 years left on the lease. It trades as a successful trade counter warehouse for building materials trade and business customers.

Andrew Murray of Cordatus said: “This is a very well-located site with a good tenant in one of the most established estates in south Manchester. The purchase adds another well-let asset with an attractive income stream and good growth prospects to our expanding portfolio and we see a real opportunity here.  We are continuing to apply proven investment knowledge to deliver above-market returns and are on the lookout for more assets.”

Cordatus has purchased the long leasehold for the Selco Trade Centre site. The lease involves 5-yearly, rent reviews.  The property is a modern detached unit comprising approximately 36,328 sq ft. with a 50-space car park.

Ereira Mendoza and B8 Real Estate acted for Cordatus. Whitmarsh Holt Young acted for the vendor.

Cordatus and CBRE GIP launched the Trust in December 2015 and had an initial funding of £150m. The Trust has now deployed approx. £178 million and continues to seek opportunities to invest in line with its investment strategy.

The vehicle is primarily targeting investment opportunities in strong micro locations, primarily in UK regional markets, with typical lot sizes of between £3m to £15m, to generate above market income distribution.


About Cordatus Real Estate (“Cordatus”)

Cordatus is a UK asset and development management specialist. Cordatus is fund manager for the Cordatus Property Trust, a recently-launched property fund focusing on sub £15m lot sizes across all sectors and regions of the UK property market. The fund has initial capital to invest of £150m.

Cordatus also specialises in the work-out of distressed portfolios and uses its specialist skills in partnering with institutional investors on selective opportunities.

Cordatus operates out of offices in Edinburgh, the Midlands and London. Our five property directors have over 130 years of asset and development management experience between them, largely within leading fund management and development companies. The directors are Tom Laidlaw, Michael Cunningham, Mike Channing, Gavin Munn and Paul Blyth.

Cordatus’ expertise is focused on asset management and value creation through the accumulated 130 years experience of its principal directors.


Media information, contact:

Ben Copithorne or Richard Pia


Email: /

Phone: + 44 207 636 7366


Meet us in Cannes

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Cordatus Directors, Mike Channing and Paul Blyth will be in Cannes During Mipim, the International real estate conference, 11 – 13th March 2019.

We hope to see you there!



Cordatus will be in Cannes

between 11 – 13 March 2019

We hope to see you there!

Mike Channing (Director)

+44 7928 702 791

Paul Blyth (Director)

+44 7801 787 915

Sierra Nevada Challenge

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In mid-September a group of intrepid walkers, including Cordatus director Mike Channing, enjoyed a trip to the Sierra Nevada in southern Spain to conquer Mulhacen, the highest peak on the Spanish mainland, which stands at 3,479m (11,413 ft).

Mike commented, “this was quite a challenging 10 hour day, which started nice and early at 7am. The effects of altitude were felt by all of the group in the later stages of the climb, especially by Cameron, who had decided to run up the mountain to keep fit for an upcoming fell run! The views from the top were spectacular though with the weather clear and this made it all worthwhile”.