Buying strategies of three UK shopping centre investors

“I’m wondering what a lot of investment agents are doing at the moment,” says Sovereign Centros chief executive (and former Strutt & Parker investment agent) Chris Geaves while pondering the question of how many shopping centres might change hands in 2017. “There will need to be a lot more ingenuity in bringing schemes to market – the days of waiting for brochures to land on desks are over,” he adds. The image of collective agent thumb-twiddling may not be that far-fetched. Research from Knight Frank shows total UK shopping centre investment volumes barely topped £3bn in 2016  and not even the most optimistic agent is forecasting more than that for the coming year. “There’s been a big reduction in private equity players as the perception of future inward yield shift has gone,” says Knight Frank partner Charlie Barke. In other words: don’t expect to see Aldi/Lidl-length queues to the check-out for shopping centres, at least in the first half of this year. The least likely buyers are UK institutions (see below). Barke reckons they will be back in the game for malls by the end of the decade, “but at the moment they are low on the shopping list”. Most likely to be heading towards the tills are overseas buyers. “We’re increasingly seeing more coming from continental Europe, like German open-ended funds, as well as US players via asset management platforms,” says JLL head of UK retail investment Fraser Bowen. A question mark hangs over local authorities – the surprise buyers of 2016. Suggestions that their activity will decrease this year are premature, reckons BNP Paribas Real Estate head of shopping centre investment, Stuart Cunliffe, who points out that such deals often allow the public sector to drive urban regeneration plans forward. “As long as interest rates remain low and retail is expensive and difficult to develop local authorities will want to be involved,” he says. In terms of product, big buyers will be drawn to prime and super-prime centres. “These come up so rarely that there is no rationale for prices softening,” says James Findlater, head of shopping centre investment at Colliers International. At the other end of the scale, district centres are attracting some interest (see below). Barry O’Donnell, head of shopping centre investment at Cushman & Wakefield, says: “There are ‘good secondary’ centres that have a future.” The centres most likely to suffer from tumbleweed years are those in the middle ground. While agreeing that prime assets will remain the target of investors Savills associate director Toby Ogilvie-Smals says: “That chunk of the market [secondary non-dominant centres that need significant capital expenditure] is sliding down a slippery slope towards the cliff edge.” So, will shopping centre investment agents have much to do in 2017?  Strutt & Parker partner Gavin Hendry is sanguine. He says: “We’ll continue advising and creating deals that may or may not come through. There are 20 to 30 schemes which could come to market tomorrow, if there wasn’t an imbalance in pricing.” Investor insight [caption id="attachment_876928" align="aligncenter" width="847"] The Exchange, Ilford: bought back by Capital & Regional for £78m[/caption] UK REIT It was a case of déjà vu for Capital & Regional, which was involved in two of the four shopping centre deals that completed in Q1 2017. The UK REIT splashed £78m on buying back Ilford’s 300,000 sq ft The Exchange (net initial yield 6.7%). Its Mall Fund sold the east London centre to Meyer Bergman for £71m in 2010 (a yield of 8.2%). But with checkouts virtually on the platforms of Ilford’s new Crossrail station, now was considered an ideal time to bring back into the fold a centre that epitomises the REIT’s core market: London & South East-located centres that dominate their local areas. Future purchases are therefore most likely here. “We’d need to be persuaded to go further afield, for example by a strong yield play,” says Capital & Regional’s investment director James Ryman. “For us this is about sustained growth to pay dividends.” However, the REIT may also be tempted by small, opportunistic plays outside the South East. One of those accounted for its other deal this quarter, the sale of the jointly-owned (with Drum Property Group) 235,000 sq ft Buttermarket in Ipswich, Suffolk, to National Grid Pension Fund for £55m (a yield of 5.9%). The centre had originally been bought for £10m and had a further £25m injected into it. Similar centres, which have failed in their previous guise, will be on Capital & Regional’s radar although Ryman cautions: “We won’t pile into small assets for the sake of it – they will need to be on point.” Private propco Off-market deals may be the way forward over the next few years for canny investors, reckons the man who runs Sovereign Centros. “In my experience I’ve never seen such a period when the factors are so complicated,” says chief executive Chris Geaves. “I’ve never seen so much money, so much potential to spend. Yet at the same time investors are more discerning than ever before, bank lending is much more difficult, and there is consequently more due diligence.” As if those factors weren’t enough, adds Geaves, retail tenants are becoming more demanding and more adept at brokering harder rental terms, using the very real threat of potentially moving away from city centre locations. “I wouldn’t underestimate the pull of out of town,” says Geaves. More discerning retail occupiers will require landlords inject money into improving existing centres, which could see the wholescale redevelopment of parts of some malls. The current environment is particularly challenging for private equity investors, who had previously banked on internal rates of return of between 16% and 18%. “They can’t really get that now as the yield-shift-of-1% days are gone,” says Geaves. “They are now looking at an IRR of 14%, which begs the question of whether some schemes are ever going to trade.” Sovereign Centros itself will focus on second centres in large towns. UK fund manager [caption id="attachment_876929" align="aligncenter" width="847"] 5 Rise shopping centre, Bingley, West Yorkshire: bought by Cortadus in 2016[/caption] Niche fund management company Cordatus has recently bought assets in Whitley Bay, Tyne & Wear, and Bingley, West Yorkshire, for the initial £150m round of the Cordatus Property Trust – and expects to do more of the same. “Our plan is to invest in lot sizes of £3m-£15m and deliberately fly under the radar of the big companies,” says director Gavin Munn. “Those smaller lots sizes tend to give better returns.” The downside of smaller centres can be a plethora of small tenants to manage, though even here there are silver linings. “Annual rents are only around £20,000-£30,000, so if there is a void, someone is likely to be able to fill it easily,” says Munn. One of the big attractions of small district centres is that they are resilient to economic change. Shoppers come here for essentials that they are unlikely to buy online, possibly two or three times per week, rather than a large single shop. For this reason Cordatus places neighbourhood centres at the low end of the risk spectrum. “Yield compression is likely to be limited, so we’re looking at income, though growth won’t be dramatic,” says Munn. Unlike Capital & Regional (see above) Cordatus is likely to be looking anywhere in the UK apart from the South East for its future district centre purchases. “We’re very happy looking where others aren’t,” says Munn. RETAIL & LEISURE SPECIAL ■ Brexit better than the 2008 recession… and the rise of the robots Even in times of economic downturn, consumers still need to feed, wash and clothe themselves and so will continue to purchase items they require, less what they simply desire, meaning the convenience market, that in which NewRiver focuses on, will remain robust. Read more… ■ Discount chain applications power supermarket surge nationwide Applications for new supermarkets grew 24% by square footage in 2016, with discount chains Aldi and Lidl dominating activity nationwide. Read more… ■ How to turn a profit from retail investment An unusual deal closed in Ipswich this February – a deal that defied a trend plaguing retail landlords across the country. Read more… ■ Buying strategies of three UK shopping centre investors “I’m wondering what a lot of investment agents are doing at the moment,” says Sovereign Centros chief executive Chris Geaves while pondering the question of how many shopping centres might change hands in 2017. Read more… ■ The new shape of retail and leisure development Online retail, rising costs, viability issues and a discerning consumer that increasingly wants more from their shopping trip. It’s a heady mix that is piling pressure onto shopping centre developers. Against this backdrop, what are the prospects for the sector and its ability to deliver new space? Read more… ■ Crown Estate looks to its regional assets for growth prospects This summer, the £140m Rushden Lakes retail and leisure scheme opens in Northamptonshire. For the Crown Estate – best known for its Regent Street, St James and Mayfair portfolio – the Northamptonshire project marks a new commitment to the regions. Its ambition is nothing less than to lead the regional retail market. Read more… ■ Why the UK’s thirst for coffee is good news for landlords and investors Things have come a long way since Rowan Atkinson’s Blackadder III described the beverages served in Mrs Miggins’ London coffee shop as “brown grit in hot water”. Read more… ■ E-tail gets physical when building a brand “We have enjoyed a lot of success online, but nothing beats the feeling you get standing outside your own store watching excited customers walk out clutching their bags,” says James Gold, co-founder of fashion accessories brand Skinnydip. Read more… ■ Can high street shoe shops step up as shopping habits shift? Like a well-worn pair of favourite shoes that have started letting in water, part of the UK’s footwear retail sector is starting to look like it needs repairs – or even replacing. Read more…