Dated, over-rented and empty, retail warehouses have come to be considered as monuments to a bygone era. But as sector returns continue to grow, is a retro retail revival on the way?
We live in an era of geeky retro obsessions: hipsters collect portable typewriters, grown men hunt out vintage Lego, Scooby Doo merchandise is the subject of fierce bidding. Some investors’ passion for 1980s and 90s retail warehouses seems to fit the same pattern.
Nothing, surely, is more retro than out-of-town retailing? Big boxes for bulky purchases felt like the future in 1985. Thirty years on, too many of the UK’s 1,000 retail warehouse parks are dated, over-rented or empty, monuments to a sun-kissed, California-style retailing future that simply never materialised in damp, cold Britain.
Yet talk to the enthusiasts and the joys and thrills of collecting retail warehouses begin to emerge. It is not a game for amateurs – hell no, they insist – but if you have the nerve, the quick appraising eye that can spot a near-mint specimen and the cash to invest in smartening it up, this sector could be a winner.
According to DTZ, investment sales of retail warehousing totalled £635m in the first half of 2015, up 33% on the same period in 2014.
Earlier this year, NewRiver Retail bought the 13 retail warehouses in the Ramsay Portfolio from Morrisons for £69m, reflecting an 8% net initial yield. The portfolio totals 462,926 sq ft let to 36 occupiers, with an occupancy rate of 97%. It has an average of six years left on its leases and an average rent of £12 per sq ft.
The new buys join a portfolio that includes the 114,000 sq ft Lower Audley Street retail park in Blackburn, which was bought in February for £14.6m, a yield of 8.85%.
NewRiver director Charles Spooner says retail warehousing will grow from around 10% of its portfolio to 15-20%.
“All our parks have an angle for extension, or redevelopment,” he says. “We try to buy the things others don’t want, parks with decent trading records and sustainable rents from a low base, although perhaps they need some tarting up. We have bought 20 in the past year, a total of £115m at an average yield of 8.5%, assets which we don’t think the market is pricing correctly.”
NewRiver knows exactly what it wants: rents of around £10-£15 per sq ft, and scope to insert some discount-retailer tenants and branch out into multi-channel retailing.
George Cotton, head of out-of-town retail at BMO Real Estate Partners, is another fan, but, like Spooner, there are some retail parks he wants and others he just walks past. His hit-and-miss list is straightforward: “Some are over-rented, so there is going to be pain for landlords when leases end, and some of the lease lengths are not very attractive.
“But, on the other hand, the consumer market is still robust for those things that make sense based out of town, and there is a natural fit with click-and-collect, which can work well at retail parks because there is free parking and retailers have storage space. So the sector still has legs.”
BMO’s experience has been rosy – see the Sears retail park, below – but Cotton says things do not always end up smelling sweet. Buying the wrong thing at the wrong price could be costly, he says.
“Secondary, even poor secondary, stock is now trading at yields of mid-7% to mid-6%, but those sites are not without issues, short-term income and covenant risks,” Cotton adds. “You have got to get a handle on the true rental value at these places. And you only need to lose a couple of tenants and the maths can become tricky. This is not a game for the faint-hearted.”
Spot-on, says Neil Varnham, managing director at Pradera. “We have bought 22 retail parks in the last four years, and we have got four more buys in due diligence – but we are not buying the sector, we are buying individual assets based on individual business plans and the key
is really understanding the retailers,”
he says.
“We don’t mind buying a challenged or distressed asset because, if we have done our homework properly, it might not be as challenged as it looks.”
De-risking – in particular filling voids in parallel with the purchase of the park – is key to the Pradera approach.
Retail warehousing is not for everyone: many of the UK funds view retail parks as over-rented dinosaurs, not income-yielding destinations. And the penalties for picking the second, third or fourth-rated park in a town – a destination nobody wants, with a tenant mix nobody cares for – are high.
But retail parks are not just for geeky collectors – they really can make money.
Over-rented
Planning to buy a retail park? If the rents are above £27 per sq ft – stop. You are walking into dangerous territory.
So says Neil Varnham, managing director at Pradera and an old hand in the retail warehousing sector.
“Rents above £25-£27 per sq ft should cause buyers to pause and consider whether it’s going to work for the retailers. There needs to be a sanity-check on rebasing rents. Landlords should ask if that needs to be done, and if it does, do it. Just acknowledge that some of the rent is froth,” he says.
Smell the coffee…
Landlords have learned to adapt ageing retail parks, transforming them from dinosaurs to destinations by adding coffee shops and new reasons to linger. But are retailers learning the lessons, as well?
Some are, some are not, say specialists at KPMG.
Partner Chris Laverty says retail park landlords have adapted well to changing shopping patterns. “In contrast to the UK high street, they have stood up remarkably well to the onslaught of internet shopping and some have even flourished,” she says.
While landlords rethink, retailers are responding with mergers (such as the acquisition of Carphone Warehouse by Dixons and Habitat by Homebase), concessions and quasi-concessions (Argos and Jessops in Sainsbury’s, Tesco’s Giraffe and Harris & Hoole) and bigger units with more to offer customers.
“Next appears to be one of the few retailers embracing larger units,” says Laverty. “It has successfully created more reasons for shoppers to visit with its fashion, home and garden concepts and introduction of Costa coffee shops into larger out-of-town stores.
“John Lewis has also created a bespoke, out-of-town concept of similar ilk. But soon retailers will need to think beyond coffee. Early adopters have gained some instant gratification through the installation of coffee shops in otherwise redundant floorspace – however, the caffeine fix will soon wear off,” he adds.
Sporting chance
Sports Direct’s approach to new retail park lettings could set a trend, says Dominic Walton, partner at Knight Frank.
“As the market improves, we will see shorter leases and rent-review capping, and tenants preferring to keep their flexibility,” he says. “Look at Sports Direct, which is often prepared to pay a little more for insisting on a break at five years, but where typically a higher rent reflects that.
“Retailers like Sports Direct have no rule – it’s all variable, reflecting circumstances – but you could be looking at rents up by 10-15%, or paying a premium of six months’ rent to exercise the break at year five.”
Incentives down, rents up?
One year rent-free on a 10-year lease? It is the kind of question potential tenants are hearing as they negotiate with today’s retail park landlords.
Five years ago, they might have got two years – or more – and some retail warehouse specialists claim to detect signs of rents creeping up, too.
Quadrant Estates’ founding partner Christopher Daniel is working with partners including KKR, Orion and Carval as well as expanding his retail park portfolio.
“Vacancy rates are going down, the homeware retailers which drive rents are expanding, we can see rental growth on the horizon, perhaps not far away,” he says. “There are already moves in some locations – look at Turner Rise retail park in Colchester.”
Dunelm and Carpetright are among the names at the 125,000 sq ft park, acquired in 2011 in a joint venture with Schroders Exempt Property Unit Trust. Daniel says: “We bought it at rents of £12 per sq ft, and we are now letting at £17 per sq ft. The park has found its value niche.”
Sears retail park
Tidying up a tired-looking retail park is not cheap. At Solihull’s £70m-plus Sears retail park, BMO Real Estate has spent as much as £3m on physical improvements and tenant incentives – and it is now paying off.
TK Maxx is now moving into the final unit on the 138,000 sq ft scheme in the affluent Midlands suburb.
“Parks need to adapt, they have to become a destination, and we have invested heavily,” says Quadrant Estates’ Christopher Daniel. “The old Comet unit has gone to Next Home and Garden, and it is now looking more like a shopping centre. It is all falling cheerfully into place.”
