Investors are likely to begin buying retail parks ahead of high street shops and shopping centres when footfall in the UK starts to gradually recover.
The vast majority of investment sales were halted in mid March in the UK. However, brokers believe that a combination of a level of resilience in the out of town market combined with a pool of willing buyers and sellers on standby, make the investment outlook reasonably promising for retail parks.
James Gulliford, joint head of UK investment at Savills, told PropertyEU there is potential depth for retail parks to trade, based on the level of interest in the sub-sector at the beginning of the year.
‘We definitely had renewed interest in UK retail parks in the 10 weeks from January to mid March when we saw approximately 25 different parties make offers on retail parks of scale’ he said.
‘There was optimism at the start of the year, post the December general election, and after better-than-expected Christmas retail turnover. In addition there was a perfect match for trading: of institutional sellers with historically high weightings to retail; private equity buyers looking for a counter-intuitive, high-yielding play; and reasonable depth of debt for retail park assets.’
In research this week on the out of town retail market, Savills points out that retail warehousing has a head start in terms of some of its retailers being able to trade during the lockdown. Some 61% of floorspace in this sub-sector was designated as essential retail due to supermarkets and DIY retailers occupying large stores.
For shopping centres, the essential retail floorspace figure is just 25%.
Furthermore, as restrictions on non-essential retailers begin to be relaxed, retail parks will be easier to operate, Gulliford said.
‘As big units, retail parks are almost perfectly set up for social distancing and they have large, open-air car parks with some 95% of shoppers traveling to them by car. Consumers are shopping for big items and have done their research (before buying) so they’ll want to get in and get out rather than browsing. Another point is that retail parks cater for click-and-collect.’
He said: ‘If you look at what the retailers are doing, they are concentrating all their efforts on opening their out-of-town stores first.’
No thaw until Q4
Nevertheless, Gulliford does not expect any unfreezing of the retail investment market in the UK until after the 24 June quarter day and more likely not until after September. ‘The common theme is everyone is waiting to see what happens on the June rent quarter day’, he believed.
There is universal expectation in the UK that collection rates in June will be lower than March.
Another issue will be debt which market participants say is now simply not available for retail except from debt funds, at high prices. If this continues, buyers will pay less for assets.
“The number one challenge for a potential buyer is the ability or otherwise to get debt. I would say three-quarters of the buying market would want debt finance for a retail acquisition. Some buyers can exchange and complete without the debt and then debt-gear a transaction down the line,’ Gulliford added.
Deals which were agreed in Q1 2020 were reportedly trading at values of £200-£300 per sq ft - not very far off build costs of £150-£175 per sq ft.
Some Q1 transactions went ahead, such as M&G Real Estate’s sale of a park in High Wycombe to the Church Commissioners and Aberdeen Standard Investments’ of a London retail park in Beckton and Hermiston Gait in Edinburgh.
Both M&G and ASI are selling assets from open-ended balanced funds which they have gated to prevent a run on the funds by investors.
Others assets are ‘parked’ in exclusivity, such as the circa £90 mln sale of The Fort shopping park in Birmingham and M&G’s of Bolton Shopping Park - or they have been pulled altogether. An example of the latter includes the highest-profile casualty of all, Orion’s £400 mln offer to buy seven parks from Hammerson.
Gulliford expects to see a more forensic focus in future on capital values per square foot. ‘A yield is just a point in time. If tenants can’t pay the rent then the yield is completely irrelevant. I think in future a lot of people will look at retail assets on a capital value per sq ft basis as well as a yield basis.’
