11th September 2019
Are things starting to look up for shopping centre market?
At the end of last month, Savills published its latest snapshot of the shopping centre investment market in the UK. While much of the report made for predictably depressing reading, it also contained some tentative indicators that the market might be about to turn a corner.
According to Savills, UK shopping centre transactions reached £295m in eight deals in the second quarter of this year, up on the £280m achieved in the second quarter of 2018.
While the total for the first half of 2019 came in at £567m, significantly less than the £913m traded over the same period last year, the report noted an increase in the volume of stock coming to the market, raising hopes that the pick-up in momentum seen in the second quarter will continue.
So is this the beginning of a recovery in the shopping centre market or just a blip?
“While volumes remain depressed, during the course of the second quarter stock started to flow more freely,” says report author and commercial research director Mat Oakley.
Opportunistic investors seem to be taking a renewed interest in the sector, calculating that pricing must be bottoming out.
Gary Roberts, managing director at Praxis Capital, says: “We follow the cycles, so as a business we bought in this sector in 2011 and 2012, when we were last in a recession and it was deemed an opportunistic investment, and we’ve been buying again fairly recently. We’ve bought five shopping centres in the past 20 months.”
‘Not all retail is dead’
However, Roberts says Praxis remains cautious about the nature and locations of the retail assets it looks at. “We are not a buyer of just any shopping centre, but we have a belief that not all retail is dead,” he says.
“The overwhelmingly negative press associated with pockets of failing retail has dragged down the entire market to a point where pricing on the buy side, if you can get hold of assets, is attractive, although there is still quite a big gap between what vendors are looking for and what buy-side capital is willing to pay.”
In addition to identifying suitable assets – and driving down vendor expectations – investors also need to contend with a lack of liquidity in the debt market. “Looking ahead, it is the availability of debt that will play a key role in unblocking shopping centre investment,” says Oakley.
“Buy-side capital might get a bit more aggressive if there was a deeper debt market here,” adds Roberts. “If there was more liquidity in the debt market and we could get it cheaper, then theoretically our price could increase.”
According to Adam Buchler, founder of BBS Capital, some lenders do understand that the current state of the shopping centre investment market presents opportunities.
“People recognise in the lending community that you can’t just label an entire sector toxic,” he says. “The nimbler and more entrepreneurial among the lenders will see this as an opportunity.”
Buchler adds that lenders want to fully understand what buyers intend to do with assets before they are willing to lend. “The opportunity depends on the business plan that is put in front of them and the ability of the sponsor to deliver it,” he says.
“Most retail needs to be repositioned in some way, so there needs to be a credible plan on the table. With a shopping centre, it is no longer sufficient to say ‘here is the rent roll, the yield is X and we believe it will increase’. That doesn’t work anymore.”
While investors are clearly still treating the shopping centre market with caution, the hope is that the activity seen in the second quarter is a sign of things to come – and that Brexit will not throw another spanner in the works.
Fri 6 September 2019