UK shopping centre deals hit 10-year low - DTZ

The number of shopping centre transactions in the UK dropped to a 10-year low in 2007, DTZ said on Wednesday. The total number of shopping centre transactions was down from 81 in 2006 to 42 last year.

However, the property advisor's latest Shopping Centre Review suggested that a 'flight to quality' led to average lot sizes reaching a record £89 mln (EUR 120 mln), £19 mln up on the previous high of £70 mln in 2006.

DTZ said 2007 got off to a strong start, with the total value of transactions completed in the first and second quarter exceeding the same period in 2006 by 9.7% - £2.6 bn compared to £2.37 bn. The momentum slowed in the third and fourth quarters, eventually resulting in a total transactions value in 2007 of £3.73 bn compared to £5.67 bn in 2006, representing a drop of 34%.

Throughout 2007, and particularly in the final two quarters of the year, the UK shopping centre sector saw the quickest correction in yields since the 1970s and a widening gap in values between primary and secondary assets. This shift of between 50 to 100 basis points was heavily influenced by the increased costs of borrowing, due to the rises in the base rate coupled with the credit crunch, the report said.

'We believe yields have stabilised for primary and good secondary schemes, although 2008 is likely to see a further softening of yields for secondary and tertiary schemes,' explained Mark Williams, head of Retail Capital Markets at DTZ.

'Yields are very asset-specific and owners will need to manage their centres in order to drive performance and can no longer rely on positive market movement to create value. Rental growth is now key to the delivery of owners' required internal rates of return (IRR), and it is expected that dry assets with limited asset management opportunities will fair worst in the market moving forward.'

He said investors with the equity to invest in prime schemes will continue to be active in 2008. The exit of unit funds from shopping centre investment in 2007 was taken up by leveraged buyers and overseas investors targeting higher IRRs. Last year saw unprecedented levels of demand from overseas investors, who accounted for £1.95 bn of investment representing 51% of purchases by value.

'The level of foreign money coming into the UK market and particularly shopping centres looks set to continue in 2008,' predicted Williams. 'Shopping centres, most notably prime assets, are considered to be a safe haven for global investors. The speed with which the UK market has corrected, coupled with the underlying fundamentals, means the sector offers fair value and we are likely to see an upswing in purchasing activity from the Australian and Canadian superannuation funds, sovereign wealth funds from the Asia, and pensions funds, corporates and private equity funds from the US.'

* The International Council of Shopping Centres holds its European conference in Amsterdam from 16 to 18 April this year. Click on the link below for more information.