Britain’s service sector – the most important part of the economy – is rebounding rapidly. A recent survey shows activity in the sector at 16-year highs.
Rising house prices – fuelled by the government’s efforts to reflate the bubble – have boosted consumer confidence, and are in turn leading people to spend more.
As we’ve said before, this cyclical recovery could well run into trouble after the election. But in the meantime, you can take advantage.
Retailers are one option. But it’s hard to find any obvious bargains in the sector. There’s another area that’s benefiting from the rally on the high street – commercial property.
And one part of London in particular looks well-placed to profit…
Reports of the high street’s death have been somewhat exaggerated
My colleague Ed Bowsher recently looked at ways to profit from the UK rebound by investing in the retail sector.
Another option is to look at the companies who own the shops that retailers sell out of.
This may seem a risky bet. The “death of the high street” has been proclaimed across the land. A combination of high taxes and bills, sluggish sales and competition from the internet is destroying traditional retailers.
Soon the high street will host little more than cafes and restaurants, while the remaining shops will be reduced to collection points, where people can pick up goods they bought online. These don’t need much space. So that means lots of vacant lots. Which in turn, means lower rents and lower property prices.
There is no doubt that variations on this scenario are playing out in some parts of the country. Some town’s high streets face long-term decline. But often this is due to specific local problems.
On a UK-wide basis, the outlook is actually more positive than you might think. There are signs that retail chains are going back into expansion mode. Property group IPD reckons that the proportion of vacant retail spaces has fallen from a peak of 7.4% in the spring to 6.8% in August. It also thinks that rents and capital values for the UK as a whole are starting to rise again.
The UK’s busiest shopping centres
So where are the hotspots and the no-go areas? To get an idea of the disparity, you only have to look at Rotherham, where nearly a quarter of retail space is empty, according to Colliers International. The comparable figure for Oxford Street in London, on the other hand, is 2.4%.
It’s a similar story in other areas. On the whole, rents in the regions are static. In contrast, Central London rents have gone up by 5.7% in the past year.
One part of London that is doing particularly well is Canary Wharf. Cheap office space and good transport links have helped it to weather the financial crisis. There are now more bankers in Canary Wharf than in the City of London.
Overall, 100,000 people work there, mostly in high-paid jobs, compared with 25,000 a decade ago. There is also a big effort to encourage technology firms to locate in the area.
This concentration of people with lots of cash and not much time, make it a dream location for retailers. The shopping centre that dominates the area is one of the most successful in Britain. For instance, the local branch of Waitrose enjoys the highest sales of the entire supermarket chain. Luxury retailers are also well represented. There are virtually no vacant spaces.
So how can you invest in Canary Wharf?
The shopping centres and around half of the offices in the area are owned by Canary Wharf Group (CWG). Rising rents and increases in capital values have pushed up the value of the company’s retail portfolio by nearly 7% in the last year.
Now the company plans to open up a new six-storey shopping centre around the Canary Wharf Crossrail station. This station – which cuts travel times from Canary Wharf to central London, and connects it directly with Kent – is expected to become a major hub for the area. Even although the centre is not due to open until 2015, around half the retail space has already been pre-let.
CWG is also developing other projects. It has recently completed a major extension to one of the existing shopping centres, and is looking at developing other parts of Canary Wharf. The company is also involved in the ‘Walkie Talkie’ office block in Fenchurch Street (yes, the one that made headlines in the summer when the sun’s reflection damaged a Jaguar).
CWG isn’t directly listed. However, its parent company Songbird Estates (LSE: SBD) is. It’s not risk-free by any means, since Songbird has taken on a large amount of debt. However, as JP Morgan point out, it has been careful to plan this. This means that interest payments are a relatively low 5.8%. At the same time, maturities are long – so the company won’t need to refinance it in for a long time. Trading on five times current earnings, and at a 12% discount to the net value of its assets, it’s a buy.
• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.
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