“Opportunity and intrigue” will abound in the year ahead for the private investor, as pressure grows for funds and investors to rebalance portfolios and bring debt covenants back into line.
Speaking to EG ahead of the publication of Allsop’s annual review of the commercial auction market, partner and auctioneer George Walker said: “There is a lot of retail to be traded. If the industry is going to accept the new realities of value, it needs to move this stock on. It might be very uncomfortable. Everyone knows this, and some have been acting for over 12 months already, getting ahead of the game.”
One major fund sold a high street lot in Chester at more than £3.9m, a net initial yield of 10.96%, in Allsop’s December sale. It is a route to market already well trodden in recent years by Columbia Threadneedle, but many landlords of former institutional-grade stock have been holding back due to the collapse in values.
The Chester lot (pictured) – comprising three shops (one vacant), a pub and seven flats (let) – produces £461,360 pa and sold for £3.95m. “The purchaser is an experienced propco. Its investment committee believes in the high street. It is just a matter of spotting the right time to invest,” Walker said.
Such opportunities for increased short-term yields look set to continue to draw a strong market from investors happy to explore alternative uses. Indeed, Walker currently has dozens of buyers chasing a £5.5m, 220,000 sq ft shopping centre in Coventry ahead of Allsop’s February auction. This is a very unfashionable sector, but investors are exploring the opportunity nonetheless.
“The yield gap has widened, reflecting the risk differentials between the safest and the most opportunistic income streams, and this will continue to be the case until we can detect a baseline of genuine recovery,” the Allsop review, which will be published on 18 January, will say.
“This ongoing disruption creates the sort of market where the private investor is at its most nimble and the auction market its most efficient, so it will be a year of opportunity and intrigue.”
The review shows that, despite the fall in retail values, the sector still accounted for £256m (or 59%) of the £434m of commercial auction stock traded by Allsop last year (see the chart for a full breakdown).
“The fuel of our market, low interest rates, looks set to continue for some time, with long-term debt available at 3% fixed. This seems cheap, but a base rate of 0.1% may head into negative territory, which would be uncharted territory, adding a new dimension to assessing yields on real estate and stoking demand from investors,” the review will say.
Allsop’s commercial total for the year was down only slightly from the £436m of stock sold in 2019, when retail accounted for £301m (or 71%) of assets sold. Its closest competitor, Acuitus, sold £118m (2019: £177m), according to data from Essential Information Group.
Further predictions
- Multi-million-pound lots: Allsop’s last auction of 2020 saw an added-value mixed-use lot in Ruislip, in the London Borough of Hillingdon (lot 14) sell for more than £10m. The parade of 14 shops, eight flats and rear land sold at a net initial yield of 4.28%. With funds and REITs needing to make more timely disposals and new capital in the market every month, Allsop expects to see more multi-million-pound lots sell through auction this year.
- Vacant premises: There will be more vacant stock on the market in 2021. Allsop’s December sale found a ready market for a vacant shop and ground rent above in Chelsea, SW3 (lot 71), which sold prior for £1.075m.
- Long income: With negative real interest rates now a reality, buyers will compete ever harder for long-dated income, and this will only increase as confidence improves and cheap debt becomes a long-term feature of the market. Fixed increases and CPI or RPI increases drive the competition particularly hard. In December, Allsop sold a pub in Upminster, in the London Borough of Havering (lot 4), let on a long lease expiring in 2072 for £1.8m – a net initial yield of 4.29%.
To send feedback, e-mail julia.cahill@egi.co.uk or tweet @EGJuliaC or @estatesgazette
