COMMENT: As we enter the pantomime season, thousands of children attending performances of Peter Pan will be asked “Do you believe in fairies?” It’s perhaps the first “leap of faith” that many young minds are asked to make, says Richard Auterac, chairman and auctioneer, Acuitus.
Meanwhile, in the property business, the question that seems to require an equal leap of faith at present is “Do you believe in retail property?”. It certainly seems to have pretty much divided the investment sector.
If you were guided purely by the incessant “Death of the high street/department store/shopping centre” media headlines, you would find it very hard to believe this particular property asset class had any future at all.
However, it seems that there are a lot of investors – and particularly those in the auction room – who do believe the sector has life and prospects.
In the October round of auctions, more than £133m of retail property was bought by investors. Of the 40 rounds of auctions that have taken place since February 2011, this was the fourth-highest volume of retail property that has been traded. The October level of retail sales was 57% above the long-term auction average and accounted for 87% of all lots sold.
“Ah,” I hear you say, “but what sort of yields were these sales done at?” Given the negative sentiment towards the sector, you might expect double-digit yields but the average yield at which the October lots were sold was 8.2%. This compares favourably to a long-term UK average of 8.7%, and is hardly an indicator of fire sales.
Of course, conversely, for this volume of retail properties to come to auction also requires a large number of willing sellers who want to go “ex-retail”. So, it seems we have two very distinct camps in the auction room: those who passionately believe that now is the time to get out of retail and those who are prepared to purchase at average yields which have proved remarkably resilient while acknowledging that today’s rents are much lower than they were 10 years ago.
So who is right? Well, in terms of their respective standpoints, maybe both factions are.
For sellers who consider themselves overweight in asset management-intensive retail, disposals make sense. The proportion of the average institutional property portfolio dedicated to retail has probably halved over the past five years and that adjustment continues to trigger sales.
And for private investors who are searching for yield and medium to long-term returns, retail property fits the bill. Firepower from this group of buyers continues to strengthen. Data from Essential Information Group and Property Data shows that out of a total of £1.58bn invested into commercial property by private investors during the first seven months of this year, 40% of this transactional volume – £630m – flowed through the auction room.
Online v bricks and mortar
In the debate around retail, there seems to be a growing consensus that the widespread concern about the effect of online retailing is now moving to a more reasoned phase and there is an increasing focus on shaping the “physical” shopping experience.
Online shopping now accounts for around 18% of total retail spend and it has been reported that this is expected to plateau at around 24% – or about £1 in every £4 being spent.
However, the pull to physical shopping remains compelling for reasons of both convenience and experience – and it’s not just those who grew up in a non-digital world who feel that way. A recent survey of 2,000 people aged 18 to 35 across the UK by brand experience consultancy I-AM revealed that 74% of millennials preferred physical stores to online shopping.
Perhaps most tellingly, Google – the ultimate portal for buying stuff online – is now rolling out a search function that helps shoppers find out what is available on the local high street. The venture – with British tech start-up NearSt – enables people to search the local availability of products and shows how far away they are and what their price is.
Meanwhile, Visa’s “Keep It local” Christmas ad showcases the British high street and the independent retailers and shopkeepers that are key to its survival.
All this is not to underestimate the continued pain that the retail property sector will feel in the coming months. As a nation, we are still “over-shopped” and many retailers are still suffering from the “lease legacy” of better days.
However, it seems that an increasing number of people are beginning to believe that retail has a future. Some of the auction purchases of retail property that will take place in the coming months may eventually prove to be very astute.
