An unusual deal closed in Ipswich this February – a deal that defied a trend plaguing retail landlords across the country. What made this transaction special was not an eight-figure sale or a low single-digit yield; what made it special was that it made money – a lot of money – after two years of asset management.
Adding value should not be news, but it is. When Capital & Regional sold Buttermarket Shopping Centre in February for £54.7m – more than five times the £9.6m it paid for the shopping centre in 2015 – it became one of the few to take a secondary asset, add significant value to it and then sell it on.
According to EG Research data, since 2010 five shopping centres have been bought and later sold for at least double the original price – while a quarter have lost value, despite asset management.
“Long gone are the days when you could just buy an asset, sit back and let the yield movement do all the hard work for you – and then sell for a profit,” says Graeme Clark, head of retail management at Savills. “That world has gone and I suspect it’s not coming back.”
Visionaries
The first rule of shopping centre management is that it needs an all-encompassing masterplan. Before buying Buttermarket, Capital & Regional established that Ipswich represented a tight catchment with little competition. Out-of-town leisure existed but there was little on offer in the town centre, which persuaded them to focus on leisure over retail.
James Ryman, investment director at Capital & Regional, says: “We wouldn’t go in with a hope that it would work. It would have to be well researched, we would have talked to operators and have confidence that what we are suggesting will fly. In Ipswich, it was always going to be a leisure-anchored scheme and that wouldn’t change. The broad concepts were tested and set in stone before we wrote the cheque.”
He says the team turns down projects even if they could carry out a refurbishment: “Fundamentally, we’ll look at the asset: is it capable of some form of transformation in its physical context? But we’ll also look at the town it’s in. Is there appetite? Even if we can do the initiative, does the town warrant that sort of initiative in terms of what’s already there?”
Similarly, NewRiver REIT executive director Nick Sewell says that when the company was working on Regent Court in Leamington Spa, between 2012 and 2015, it became a case of setting out a plan and spending a year-and-a-half getting the council “to buy into what we were trying to do”.
The shopping centre’s restaurants were attracting customers because the town as a whole was undersupplied, and so NewRiver initially brought in one restaurant at a time in order to convince the council it could carry out the full project.
Eventually, the shopping centre, which NewRiver bought for £10.5m at an 8.9% yield in November 2012, was sold for £28.4m in January 2016 – a net initial yield of 5%.
The fundamental mistake asset managers make with shopping centres is not having a broad vision for their sites, says John Prestwich, consultant at Montagu Evans. “There are very few landlords that are focused on the secondary marketplace who have a proper strategic vision in terms of turning around the shopping centres they own.”
This is part of the reason, Prestwich says, that councils have started buying up more shopping centres themselves. Councils are able to incorporate retail and leisure into broader redevelopments that they have funding for and focus on what its residents need. In Stockport, for example, the local authority bought the Merseyway Shopping Centre last April as part of a £900m regeneration scheme, while Leatherhead bought the Swan Centre that same month, calling it a “significant component of the draft masterplan for Leatherhead town centre”.
THREE BIGGEST SHOPPING CENTRE UPLIFTS, 2010-2017
| Shopping centre | Investor | Purchase date | Original price | Sold to | Sale date | Final price | Change |
|---|---|---|---|---|---|---|---|
| Buttermarket Shopping Centre, Ipswich | Capital & Regional | 4 Mar 2015 | £9.2m | National Grid Pension Fund | 20 Feb 2017 | £54.7m | 495% |
| Clayton Square Shopping Centre, Merseyside | InfraRed | 1 Apr 2013 | £14m | Rockspring | 7 Mar 2016 | £38.4m | 174% |
| Regent Court, Leamington Spa | NewRiver | Dec 2012 | £10.5m | LaSalle Investment Management | Nov 2015 | £28.4m | 170% |
Source: Capital & Regional; NewRiver Retail REIT; Knight Frank
Into the void
While having no broad vision for a shopping centre leads to an almost certain downward spiral, it is not always the landlord’s fault. Rather than being able to carry out a fully formed plan, some landlords with failing shopping centres, Prestwich says, are “caught holding the baby”.
In centres with low occupancy, landlords will have to pay empty rates, insurance and the service charge allocation while receiving little rental income and making loan repayments. As a result, there is little financial liquidity to carry out a wholesale redevelopment. Prestwich says: “They try to address it by way of short-term measures but ultimately that has been the sticking-plaster approach, which just has not succeeded, and the banks make their move.”
However, Clark says, short-term solutions such as moving in charity shops or community events can be useful, although they do need to be strategic and relevant to the customer base.
At Buchanan Galleries in Glasgow, for example, Clark’s team at Savills brought in a beach-themed play area, free of charge, to sponsor a local children’s hospice. It stayed at the shopping centre for two months last year and was used to cover empty rates costs, bring in the target demographic – families – and have some impact on the community. “Even if they just cover the occupational costs of the unit, at least it keeps the lights on,” Clark says.
Brand appeal
For asset management to really work, that kind of visibility needs to extend to the tenants landlords are trying to woo – especially when there are heavy vacancies or a complete strategic rethink to deal with. Convincing new tenants to come into secondary shopping centres only works if you have a name with a strong track record.
When Peter Mace, head of central London retail at Cushman & Wakefield, and his team worked at Multrees Walk in Edinburgh in the early 2000s – turning it into one of the first luxury UK shopping destinations outside London – he used “the domino effect” to get tenants in. He had to convince Harvey Nichols to come in as an anchor before others, such as Louis Vuitton and Burberry followed suit. He says: “I have dealt with this business for 30 years. If you’ve got a great track record of dealing with lots of these projects, then clients are going to listen to what you have to say – at least I hope they are.”
The same applies for Capital & Regional. In his team, Ryman says, they do all the asset management in house as a way of building relationships with tenants, which gives them unrivalled access to strong retailers they can call on for their most ambitious ideas. He says: “We come at it from a position of strength in that they know what we do. They trust that we know what we are doing as specialists in this field. So when we put forward a vision, it’s one that is well thought through and has been discussed.”
Sitting back and letting the yield work its magic might not spawn the next Buttermarket or Regent Court any more, but those looking for an opportunity will eventually find it. What it takes is a coherent plan – and a sturdy Rolodex.
REGENT COURT AT A GLANCE
| Before | After | |
|---|---|---|
| Price | £10.5m | £28.4m |
| Yield | 8.9% | 5% |
| Occupancy | 86% | 100% |
Source: NewRiver REIT
BUTTERMARKET AT A GLANCE
| Before | After | |
|---|---|---|
| Price | £9.2m | £54.7m |
| Yield | 9% | 5.9% |
| Occupancy | 40% | 89% |
Source: Capital & Regional
A beginner’s guide to asset managing shopping centres
UK retail investor Ellandi has a portfolio of 32 shopping centres – some in cities others wouldn’t dare go near. And yet, their occupancy levels have stayed strong and Ellandi has become one of the most-respected names in the business. We asked Mark Robinson, property director at Ellandi: What’s your secret?
It’s all about net operating income, stupid!
Do people really talk about the zone A “tone” any more? It’s real income that services debt, drives valuations and makes up more than 75% of your investors’ returns. The net operating income should be your focus 24/7. It is not just about growing rent but also reducing costs, which leads us to…
Total occupational costs
Your retail partners care even less about ITZA (in terms of zone A); they look at rent as part of their total fixed property costs. Bear down on your service charge costs, work with them on the new rating list and they may even be happy to pay a bit more rent. Hopefully.
Customers value experience, not aesthetics
Millions of pounds are wasted every year upgrading entrances and mall finishes, when customers care more about clean, well-lit and accessible car parks and toilets where you don’t run the risk of contracting cholera (Ellandi is the only UK shopping centre investor with a Loo of the Year Champions League award). But if you really want to channel your inner Laurence Llewelyn Bowen, then a bit of paint and some funky vinyls can go an awfully long way without blowing the budget.
Any shop is better than a vacant shop
Dead frontages kill retail locations. Run win-a-shop competitions, open man-sheds, move your centre manager’s office to the ground floor. Be creative: it doesn’t even have to be retail to add value to your retailers, shoppers or the community.
Be nice to your local authority
They are not just a source of planning permissions. Local authorities are increasingly active in trying to promote and regenerate town centres. They are not only a key stakeholder but also a potential supporter and partner for proactive asset managers. They may even be the next buyer and your future employer.
The wrong place at the wrong time?
Comment from Charlie Barke, partner at Knight Frank:
The secondary shopping centre sector has faced a lengthy period of under-investment. From 2000 to 2007 investors were seeing exceptional capital growth off yield shift and rental growth and so had no need to invest further into their already strongly performing assets. From 2008 to 2012 the opposite was true. Rents were falling and yields had drifted out to such an extent that any debt-backed buyer had lost all of their equity and more, minimising the incentive to invest further into an asset on which they were already out of the money.
But what has happened since 2012? Yields were static at the start of this period, then fell a little, and now have risen a little again. So the yield movement has been relatively benign, which ought to be a climate that encourages capital investment into assets to drive value. But few have made it work. Many are now holding assets that are worth no more than they paid for them three to five years ago. Indeed, some have lost money and very few assets have been significantly altered or improved.
Create a sense of place and make shoppers stay longer
“For shopping centres, creating a sense of place throughout is essential: longer dwell-time leads to greater shopper spending – something managers don’t have to worry about as much with other asset classes,” says Caroline Walker, partner at Berwin Leighton Paisner. For Picton, which is redeveloping Regency Wharf in Birmingham, that means putting together an outdoor cinema, theatre and festival area and getting local artists in on it. It hired street artists at Graffiti Life to redo the main entrance and paint faded “ghost-signs” on the back walls as an homage to the city’s industrial history. Lettings from Rub Smokehouse and Karaoke Box soon followed.
To send feedback, e-mail karl.tomusk@egi.co.uk or tweet @ktomusk or @estatesgazette
Article originally published 30 March 2017
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“We have enjoyed a lot of success online, but nothing beats the feeling you get standing outside your own store watching excited customers walk out clutching their bags,” says James Gold, co-founder of fashion accessories brand Skinnydip. Read more…
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Like a well-worn pair of favourite shoes that have started letting in water, part of the UK’s footwear retail sector is starting to look like it needs repairs – or even replacing. Read more…
