Cass Business School has cautioned that lenders could become more reluctant to support retail assets, as well-known retailers continue to disappear from the UK high street.
Nicole Lux noted that fundamental changes in the retail sector were affecting real estate investment funds as well as lenders.
“Retail rents are falling and landlords have to increase tenant incentives, making it more difficult for fund managers to deliver investment returns for retail portfolios,” she warned.
“Some investors still believe in short-term headwinds, but the sector is shifting fundamentally. Lenders commented in the last Cass Lending Survey that they were not willing to lend to regional or secondary shopping centres, or high-street retail property in a regional city. Especially, a shopping centre where there is already more than 15% vacant retail space is quickly going to deteriorate further in value.
“Of course for some investors, these will be investment opportunities, but turnaround strategies are highly risky and investors should question their fund managers’ capabilities before investing.”
Lux added that lenders still have £25bn of debt outstanding to the retail property sector, representing around 20% of the secured real estate debt market in 2018.
About one-third of this is held by UK clearing banks and matures within the next four to five years.
“Banks have been reducing the amount they have been lending to the retail property sector since 2007, when the total outstanding debt to retail property was £55bn,” Lux said.
“Aside from dealing with insolvency and potential loan payment issues, the biggest impact will come from the deterioration of credit of these big retail names and reductions on leases, which will lead to a ratings decline under weaker slotting of these loans – which means an increase in risk capital from 70% to 250%. This will make the loan more costly for the bank.”
To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette
