There are signs of life in the shopping centre market. With significant capital and rental value correction underway, vendor aspirations are heading lower which is key to helping rebase schemes to attractive levels. Prime shopping centre yields have moved out by a full percentage point since Q3 2019.
More stock is coming to market, often at record high yields, and investors are cautiously returning, recognising the repositioning and counter-cyclical buying opportunities that are coming into view. That said, the lack of meaningful debt financing remains a major obstacle to sales processes.
Most transactions are either schemes being bought out of receivership or redevelopment plays. In October, Sovereign Housing Association purchased Clifton Down shopping centre in Bristol for £27.2m from BlackRock, with the long-term aim of creating a residential-led development. This follows on the heels of Ballymore's acquisition of The Broadwalk in Edgware for £71m in another mixed-use redevelopment deal which completed in September.
Shopping centre volumes fell to £156.8m in Q3, bringing the 2020 total (Q1-Q3) to £351.9m, down 40% y-o-y. In addition to Ballymore's purchase of The Broadwalk Centre in Edgware, the other key deal to complete in Q3 was MDSR Investments, an Israeli investor, buying the former RDI REIT centres in Seaham, Northampton and Warrington out of receivership.
Key Deals
Property
Price (£m)
Yield (%)
Purchaser
Vendor
Date
Project Rock Portfolio (3 centres)
80.0
11.0
MDSR Investments
Receivers for Aviva Finance
Sep 20
Broadwalk, Edgware
71.0
4.9
Ballymore
Aberdeen Standard
Captain Cook Square, Middlesbrough
8.0
12.0
Middlesbrough Council
LaSalle Investment Management
Jul 20
Retail warehousing investment volumes reached £455.5m in Q3, up 17.1% y-o-y. 24 assets traded in Q3, the highest quarterly total of 2020 so far.
Alongside foodstores, the sub-sector with the most room for investor optimism is retail warehousing. DIY, discount and other bulky goods operators are generally more insulated from the shift to e-commerce and trading has remained resilient throughout the pandemic. B&M, for example, plans to open up to 45 new stores in 2020 having raised its profit forecasts due to a better-than-expected performance over the year to date.
There has been a positive swing in sentiment towards retail parks, with domestic and overseas capital targeting retail assets they believe to be a crucial component to last mile fulfilment. Parks let-off sensible rents, with low fashion retail exposure, are considered particularly liquid, and the ever-growing yield gap with logistics makes for an appealing investment rationale.
M7 Real Estate bought a retail park portfolio from RDI REIT for £156.9m, at a NIY of 7.5%. The purchase price reflects a 3.0% discount to the last reported 29 February 2020 values. The portfolio includes Banbury Cross Retail Park in Banbury, St David’s Retail Park in Bangor, The Arches in Watford, Priory Retail Park in Merton, and two retail parks in Scotland.
Great Lodge Retail Park, Tunbridge Wells
46.25
7.5
M7 Real Estate
UK Commercial Property REIT
B&Q, Dunlop Way, Erdington
22.25
7.61
Realty Income
Royal London Asset Management
Aug 20
B&Q, Mucklow Hill, Halesowen
19.5
Nuveen Real Estate
There were signs of demand returning for certain high street locations in Q3, particularly smaller lot sizes (<10m), where the lack of debt is less of an issue, and historic towns such as Guildford, Chester and Cambridge, where footfall has proven more resilient throughout the pandemic as more people work from home. That said, rental uncertainty is being priced into transactions and yields continue to move outwards.
While fresh restrictions on non-essential retail could not have come at a worse time, some solace can be found in the fact that many retailers are better prepared for lockdown 2.0 in terms of pivoting to online and click-and-collect, where the store still plays a crucial role.
The new flexible planning use class “E” which came into effect in September makes it easier to change high street uses without a planning application. We believe this will encourage town centre investors and regeneration specialists to turn their attention to high street assets over the coming quarters.
With non-essential retail grappling with renewed restrictions, foodstores are once again in an enviable position. If anything, grocery revenue is likely to accelerate during November's lockdown as consumer spending transfers from restaurants and hospitality to supermarkets. Even in non-food categories such as fashion, electronics and homeware, there are opportunities for major grocery players to make gains while specialist stores are closed.
Highlighting the income security foodstores offer, Supermarket Income REIT received all of its contracted rent for 2020 to date. The trust increased its share issue by £50m to £200m due to strong interest from shareholders.
With investors on the hunt for defensive assets, it comes as little surprise that demand for supermarkets remains red hot. Foodstore volumes totalled £334.2m in Q3, up 3.5% on the same period in 2019 - which was also a strong year. This takes the 2020 total over £1.0bn, with foodstores vying with retail warehousing for the largest share of retail investment in 2020.
Q3's largest deal saw Supermarket Income REIT buy a portfolio of six Waitrose supermarkets via a sale-and-leaseback transaction for £74.1m, reflecting a NIY of 4.4%. The stores are let to Waitrose on new 20-year leases with a tenant-only break option in year 15 and are subject to five-yearly, upward-only, CPIH-linked rent reviews (3% cap and 1% floor).
Tesco Extra, Fordham Road, Newmarket
61.0
4.60
Supermarket Income REIT
Standard Life Pool Pensions
Tesco, Oakley Road, Corby
47.0
5.10
Private Investor
Henley Investments, Aprirose REI
Waitrose Portfolio, Scotland (two stores)
23.2
5.00
Avignon Capital
Town Centre Securities (TCS)