Investors are showing no signs of losing their appetite for shopping centres. Jane Roberts and Amanda Seidl investigate last year’s record numbers
Shopping centre investment enjoyed a record-breaking year in 1998. More than £3bn worth of stock changed hands in 85 deals as funds, property companies and banks took advantage of high yields and low interest rates.
Research by Jones Lang Wootton reveals that the past four years have seen almost a third of the UK’s 630 shopping centres change hands, with 25% of this number traded in the past two years alone.
Last year, property companies were the most active players in the sector, accounting for 61% of sales by value and 45% of purchases. But institutional buyers also accounted for 45% of purchases by value. Funds were generally selling out of smaller lot sizes and buying into larger deals – either individually or in joint ventures. The notable large acquisitions included two deals at Bluewater in Kent, where Prudential increased its stake by £110m and Hermes bought in to the tune of £112m; the Arndale Centre in Manchester, bought by the Pru for £315m; Hammerson’s funding of West Quay in Southampton; and two deals in Milton Keynes involving Universities Superannuation Scheme and Prudential.
“Just 8% of transactions during the year accounted for 42% of stock traded by value,”explains Robin Coady, partner in JLW’s retail investment team, who produced the research with his colleague Will Armitage (see Transactions weighted by value chart, left).
Prudential was easily the most active institution (see Prudential, the dominant player), investing almost £700m in shopping centres, or 22% of the market. With USS’s purchases – Burton and Trinity Arcades in Leeds, Grand Arcade in Cambridge and Midsummer Place in Milton Keynes – these two funds alone were responsible for 30% of acquisitions by value.
Institutional activity was confined largely to prime town-centre and regional shopping centres. But, with a few exceptions, property companies were eager to buy smaller secondary centres where they perceived the potential to improve returns through active management.
Big demand for smaller centres
Despite the influence of the big funds buying major centres, most transactions (76%) during 1998 involved purchases of centres costing less than £40m. The high proportion of smaller centres is reflected in the initial yield range: only nine transactions were at an initial yield of less than 6% (see Yield by number of deals chart, left) while 35 deals were at over 8% initial yields. Similarly, most deals reflected a capital value of between £1,076 and £3,229 per m2 (£100 and £300 per sq ft).
“Such attractive returns, coupled with the continued reduction in the cost of borrowing, goes some way to explain the high level of property company activity,” says Coady.
“After the market improved so much in the first half of 1998, I think that an average 8% initial yield is quite attractive and the market still offers a lot of value.” JLW puts equivalent yields for the very best centres at between 5.75% and 6%.
Portfolio acquisition by property companies was a feature, with British Land, Haslemere, Arcadia and Carisbrooke/Suon among the most prominent purchasers and Pillarcaisse, Hypo Bank, Milner Estates and Helical Bar active vendors.
Direct development and forward-funding deals accounted for 36% of deals by value but only 13 of the 85 transactions. Again, the major centres like Bluewater (£222m) and Grand Arcade, Cambridge (£130m), influenced the statistics.
The high cost of major shopping centres has resulted in a growing number of shared ownerships and joint ventures (see Joint ventures, above). By value, joint ventures accounted for 17% of all purchases and over half the market when combined with forward fundings (see charts above).
Banks and foreign investors represented a small but significant sector of the market last year. For the first time, banks have been directly competing in this market: they include Hypo Bank, GE Capital and Charterhouse, whose partnership fund with Ashcroft (involving Equitable Life) recently acquired The Walks in Cramlington. Hypo capitalised quickly on its purchases by selling on assets at Peckham, Exmouth, Market Harborough and Ilkley by mortgage.
The prospects for the year ahead continue to favour the shopping centre investment market, according to Coady. Restrictive planning policies on out-of-town and regional shopping centres will increase demand for existing schemes.
He comments: “The ever-increasing dominance of the major retail centres will continue to attract strong favour from investors, with innovative partnership schemes opening up the number of opportunities available.
“Despite mixed retailer fortunes in the last quarter of 1998, the falling cost of money is likely to tempt investors where there is an attractive yield gap,” he says. “However, if the economy is slowing down, the likelihood is that, after two record years, these levels will be hard to sustain.”
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Prudential The dominant player in retail centre investment The mighty Pru led this market last year, pouring £700m of new money into the sector – nearly a quarter of all product bought by value. It kicked off the year by ousting Capital Shopping Centres and securing Manchester city centre’s dominant scheme, the £315m Arndale Centre, and finished off by buying into Hermes’ Milton Keynes shopping centre to the tune of £162m. Along the way, it snapped up The Galleries in Washington in Tyne & Wear, Princes Square in East Kilbride, the Harpur Centre in Bedford and upped its existing stake in Bluewater. The giant fund’s investment in shopping represented nearly 60% of the total £1.2bn it spent on property last year. According to John Wythe, property fund manager of the £6bn life fund: “The theme is large, dominant centres. We tend to find that the returns are attractive.” |
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Joint ventures Shared ownership shows strong growth After all the hype, the US REIT funds failed to arrive to buy shopping centres last year, but 1998 was characterised by strong growth in other kinds of shared ownership schemes. This was a trend matched by other sectors of the property market. JLW identified 17% of shopping centre purchases as being by joint ventures of one kind or another. These ranged from plain vanilla joint ventures to more complicated limited partnerships. According to JLW retail partner Robin Coady, shared ownership is likely to be the way forward for trading ownership in major regional centres, “which are likely to be tightly held and where there are a limited number of investors in a position to commit several hundred million pounds to one asset”. Joint ventures included British Land’s partnership with Tesco to buy five shopping centres, in East Kilbride, Leicester, Lisburnj, Lisgelvin and Northampton, and one with Wyndham Investments in Woking, where it bought half the Peacocks Centre; Allied London Properties and Schroders’s continuing acquisitions in Bracknell; Hammerson and Barclays Bank’s joint deal to develop West Quay in Southampton; Prudential’s and Hermes’ investments in Lend Lease’s Bluewater; and, most recently, the Charterhouse Shopping Centre fund’s acquisition for £35m of O&H’s Manor Walks scheme in Cramlington. JLW’s figures do not include two of last year’s most innovative deals on the grounds that they are not conventional shopping centres: Fosse Park, the Leicester retail park, was bought for £206m by an overseas unitised trust set up by Pillar Property, Schroders and Canadian fund SITQ; and a £135m interest in BAA MCArthur Glen’s factory outlet development, Cheshire Oaks, bought by a limited partnership including the BP pension fund, Norwich Union and CIS. Cheshire Oaks was also notable for being valued for sale purely using discounted cashflow rather than conventional valuation methods. Coady, however, says that JLW is asked for DCF appraisals in addition to conventional valuations on most transactions now. The mother of all joint ventures will be the £450m Lend Lease Forward retail fund, a limited partnership of around 11 investors due to close next month, which will own part of Bluewater and Touchwood Court in Solihull. |
