Yields harden as retail investors look for longer, more secure income

Research by Allsop illustrates how far investor demand within the UK retail market has shifted in the past year to focus on assets with longer leases. The Allshop Barometer measures the yields achieved for single-let retail investments across three ranges of unexpired lease terms; long term (10-15 years), medium term (5-10 years) and short term (3-5 years). The data is analysed across the regions over two distinct periods, December 2016 to October 2017 (the sale of 501 assets which raised £255.1m) and December 2017 to May 2018 (the sale of 250 assets which raised £134.5m). The data in the second edition of the Allshop Barometer, December 2017 to May 2018, reveals that the premium being paid for longer-term income has increased, compared with the data shown in the previous edition, with all UK regions recording average yields under 7% for longer-term retail income. Average yields across the country for long-term retail income have hardened significantly to 5.9% over the past six months, from 6.8% over the preceding period. The quality of the stock sold at auction partly accounts for this, but the latest edition of the Allshop Barometer reveals growing investor appetite for longer, secure income at a time of increasing uncertainty in the retail sector. Examples of properties with long-term income include a freehold bank investment in the suburbs of Birmingham, let until 2031 with no breaks, which sold for £1.01m – a yield of 4.49% – in March 2018; and a large freehold shop in Hornchurch, Essex, let to Iceland until 2030, which sold in December 2017 for £2.02m – a yield of 5.30%. Across the UK, average yields have softened for short-term income, from 8.6% to 8.9%, with the most dramatic change in the past six months occurring in the North East, with yields softening by as much as 50 basis points. Recent headlines of high street CVAs and closures across the country are likely to be the main contributor to this, increasing investors’ perceived risk in the retail sector. In the same period, yields in the south east have bucked the trend, with competition from investors leading to a hardening in short-term retail yields from 7.8% to 7.4%. Average yields for medium-term retail income have hardened marginally to 7.7% from 7.8% over the past six months, suggesting that investor appetite for medium term retail income has broadly remained unchanged. A good example of medium-term retail income can be seen through the sale of a freehold bank investment in Harrogate, North Yorkshire, let to Halifax until 2026, which sold in December 2017 for £2.10m – a yield of 5.80%. Between the two periods, the majority of regions have experienced a marginal softening of average overall retail yields, reflecting the market’s increased caution in the high street over recent months. However, the North East, North West and Wales have bucked this trend, with average overall retail yields in these regions hardening. This can be attributed to a single vendor regional bank portfolio being successfully broken up over a period of three sales. So, despite the recent gloomy news in the retail market, the second edition of the Allshop Barometer tells a surprisingly positive story. Investor demand for the right type of retail asset prevails. People are still willing to invest in the retail market, and they will pay more for assets with longer leases. Buyers will look at regions which have previously been overlooked if assets are priced at an attractive level. Short income is attracting fewer followers. Ben Hodge is an associate, commercial auction, at Allsop