No deal With banks only just beginning to get to grips with a huge explosion of debt, the level of transactions in the retail investment market has fallen off a cliff. Paul Norman reports
“There is lots of money but no stock – that’s the market.” With that one sentence, Greg Nicholson, CB Richard Ellis executive director of capital markets, summarises a year in which any expectations that buyers would be able to sate themselves on an orgy of distressed sales have proved unfounded.
According to Knight Frank’s Shopping centre investment quarterly, total sales volume for the third quarter of 2009 were £304.5m, a 74% increase on Q2’s £175m but, with only four deals taking place and just 11 for the year so far, market activity remains subdued.
Knight Frank writes that demand may have returned, particularly from opportunity funds, but the “acute shortage of buying opportunities is preventing greater transactional activity”.
That said, after 10 months of stultifying inactivity, September saw progress. LandSec sold its one-third stake in Birmingham’s Bullring to Australia’s Future Fund for £210m, a net yield of 6.85% but still significantly below the £300m-plus it was seeking when it first proposed the sale in April last year.
Hammerson director of shopping centre investment, Lawrence Hutchings, says the deal is significant as it was “at or close to the valuation position” and provided the market with the first transaction in several months that could be analysed.
“It also represents the return of strategic investors to the sector,” he adds. “Pension funds are the traditional owners of these assets and their return is reassuring.”
Elsewhere, Scottish Widows Investment Partnership placed Invista Real Estate’s Hermiston Gait retail park under offer at £65m, reflecting a yield of 6.75%, above the £63.5m asking price.
Perhaps most significantly, September saw the forced sales of two 1m sq ft opportunities, by respectively Lloyds Banking Group, lender to the £350m Silverburn mall in Pollok, south Glasgow, and the bondholders of an £82m loan secured against three shopping centres in Shrewsbury, Shropshire.
CBRE’s Nicholson says Silverburn and Shrewsbury will provide a genuine “test of the temperature” as buyers continue to eye bargains ahead of what he predicts will be a “double dip” in the coming months.
David Erwin, Cushman & Wakefield’s head of UK capital markets, says the sale of Silverburn in particular will indicate where prices are and how much money is chasing stock. “The question will be whether the bids come in high enough to prevent the administrators crystallising a big loss,” he adds.
Knight Frank partner Anthony Havelock says that in a market where the level of transactions has fallen off a cliff the proposed disposals represent “light at end of the tunnel”. “Schemes are coming out of the banking fraternity and there is a level of stock not seen for some time,” he adds.
However, few are expecting a flood of distressed sales.
Mark Williams, head of UK retail at DTZ, says Silverburn is a “complete exception for the banks in that the asset is capable of being sold in this market at a price acceptable to the bank”. He adds: “The shortage of stock won’t change for at least 12 to 18 months.”
In fact, there are increasingly few vendors feeling the pressure to sell.
Nicholson says banks have simply had too much to deal with to focus on sales. “They are only beginning to get to grips with what has been an absolutely unbelievable explosion of bank debt. These problems require people with proper experience working on a classic investment asset management basis.”
Elsewhere, the large REITs have now secured cash through rights issues and need to start buying rather than selling to deliver income for shareholders. With the rush for redemptions ending, the institutions and funds are also in buying rather than selling mood.
All of which is driving the most frustrating aspect of the retail market – the amount of stock being pulled at the eleventh hour. Around £500m of stock was withdrawn in the six months to the end of August.
As an exasperated Nicholson points out: “Everyone gets fired up, gets the work done and then there is no sale. There’s a certain amount of let’s dump it in the market and see what happens, it seems.”
Sanderson Weatherall partner in investment Andrew Wilkinson is sanguine: “Having realised sufficient return on sales, some parties have been pulling remaining stock, leading to aborted negotiations in some cases.
“I think some property owners have done this as a market-testing exercise; if they don’t get what they want from it, they will withdraw it. These are reactions to a market that in the past 18 months has been as steady as Jordan’s love life,” adds Wilkinson, drawing similarities with the former glamour model’s very public divorce.
Wilkinson believes “capital and covenant strength and length of lease will be the key to ensuring the market stabilises as soon as possible, as it is these properties that are in most demand”.
Certainly there is no shortage of money chasing prime stock. Billions of pounds of cash is reported to have been raised to buy distressed assets, with the mix of interested parties including institutions, REITs, opportunity funds, and US and overseas buyers.
C&W’s Erwin says that there is now a “wonderfully robust market” at the top end. “Time and again people revert to type, seeking the best in terms of prime shops in the high street,” he adds.
Nicholson says the sale of Hermiston Retail Park saw 13 firm offers and a 50 basis points better than expected yield.
Sanderson Weatherall’s Wilkinson says there is particularly heated demand for leases of 15 years-plus, which is leading to a two-tier market.
“At one end,” he adds, “the market is starved of longer-lease stock and at the other, short-term low-income retail properties, where the covenant is questionable, or where there are geographical-affecting factors, are less readily sold and at lower prices to reflect the risk attached.
“This imbalance is typical of a market that has seen a drastic downturn but, hopefully, it is beginning to slowly stabilise itself.”
If, as this suggests, yields are hardening at the prime end of the market, for secondary schemes there is little evidence of buyer demand or of yields stabilising.
Savills head of retail warehousing Jaime Dunster says retail parks are proving increasingly popular with buyers but the market is equally starved of stock.
“Where it is different for retail parks is 60% of them are owned by 20 managers,” he adds. “The sector has a smaller DNA and less diversity. There is a chance that pent-up demand for retail parks could spill over into the shopping centre market.”
Briant Champion Long partner James Watson says the desperation for what little prime retail stock there is has led buyers to make mistakes.
But as C&W’s Erwin points out : “In the end there are going to be winners and losers, and the trick is: identify the losers and don’t invest in them.”
Shopping centre investment in Europe
Investment activity across Europe has slowed across all retail sectors this year.
According to Cushman & Wakefield’s European shopping centre development report for September, the overall volume of retail investment transactions amounted to just €8.3bn for the whole of Europe, a 54% decline on the same period in 2008.
Investment activity in Eastern Europe has come to a virtual standstill and Central Europe is also seeing few deals in the shopping centre sector.
The UK, Germany, France and Spain have all continued to trade shopping centres at small levels, with the UK and Germany together accounting for just over 50% of total retail investment volumes in H1 2009.
Following almost two years of increases, there is also evidence that prime shopping centre yields are stabilising.
C&W writes that in June, the average European prime shopping centre yield stood at 9.5%, compared with 5.47% at the peak of the market in September 2007.
