By James Watson – 04th July 2018
In Retail Capital Markets when we play ‘join the dots’, we’re looking at deals, values and volumes.
So we’re going to take a look at the top transactions by price across the shopping centre, supermarket, high street and out of town markets since we reported last summer.
Top of the pile in the shopping centre sector is last year’s £155m sale by Hermes to Royal London of a 7.5% share of Bluewater. The centre made headlines in March when Land Securities wrote down the value of its share by 11% while the on/off sale of the Lendlease share is rumoured to reflect a 4.75% net initial yield.
The other sign of the times in this group is Canterbury City Council’s £75m purchase of the Whitefriars shopping centre on its doorstep. Local authorities have been special purchasers across the market in the past year but this looks like one of the more rational purchases. Of course, this top slice doesn’t capture the dramatic slide in values that we’ve seen among tertiary assets.
Some assets that have not traded for a decade or more have seen their worth collapse to a tenth of what they last changed hands for. These are the assets that have been broken by the internet. Perhaps the most interesting assets in this sector are secondary shopping centres that will work with reset rents. We predict there will be value here where there are willing vendors.
So it was a pretty dysfunctional year for the sector, but we believe that these reality checks mean there can be rich pickings for those brave enough to embark on long-term asset enhancement. Being a passive investor is not an option so stock selection and being prepared to roll your asset management sleeves up has become of paramount importance.
Headlines in the supermarket sector have been grabbed by the mooted Sainsburys-ASDA hook-up but these assets have had a good year as a whole. UK institutions doubled their year-on-year investment into the sector.
However, only flawless assets are commanding the prime yields and only the institutions can afford them. These chart toppers perhaps don’t fall quite into that super prime class but show the range of buyers. Second tier assets are starting to feel the effects of more general retail uncertainty. There’s an increase in supply and the first signs of a slight drift in yields for secondary assets.
A read-across from the collapse of Toys R Us, Carpetright and Mothercare has hit the out of town/retail warehouse sector. These are the top five deals in the year to date. Of these Slough Retail Park stands out. It’s traded twice in the last 18 months with an uplift in value from £53m to £63m – a 90-point shift in yield and a significant windfall to Benson Elliot. Generally though, we’re seeing a softening of yields in the sector as that occupier shock to the system continues to be felt.
High Streets – or Storefront Property if you prefer that name – continue to struggle but there are buyers for well-let, well-located shops at re-based rents. Whilst this represents the largest of the transactions, it does show that the High Street investment market is still alive and interestingly the yield profile is robustly sharp. It’s interesting to note that of the five buyers, one is a specialist purchaser and three are from overseas.
Last we talked about ‘shops that you can’t shop in’ – the logistics facilities which serve online retail fulfilment from fashion to food. This segment of the market has continued to power ahead but in terms of rental growth there is some caution about how much headroom there is for occupiers to pay progressive rents – especially as the growth in online retailing is now slowing.
Also there is now a clear trend among the supermarket operators to favour fulfilling online orders in-store. This entails higher picking costs but lower delivery costs than a centralised hub which is distant from customers. With Ocado looking set to replace M&S in the FTSE 100, it’s interesting to note that its expansion is principally taking place overseas as a supplier of logistics tech rather than the online supermarket it originally sold itself as.
To do deals in a complex market you need clarity and we believe in this respect the last 12 months may prove to be a watershed for UK retail capital markets.
Shopping centres have been doused by reality – even if some owners remain in denial and continue to refinance. The parallels
with some of their over-leveraged ex-tenants are obvious.
In the meantime, those with asset management skill – and some cash – could lock into bargains and enhanced income returns. Supermarkets have gained a new breadth of purpose through strategic mergers while the approach to fulfilment can bring new value to existing stores. Precise stock selection means that even the demonised High Street can present opportunities. So there’s no escaping the fact that if you join the dots in the retail capital markets what you get is a far from rosy picture.
But what we might be seeing is the first signs of ‘Pendulum Economics’ – an over compensation phase during which pricing becomes detached from underlying value. In the coming months, identifying those situations will be a fascinating process – at least for the bold.