By Tom Leahy on December 3rd, 2018
U.K. retail property is getting a bad press: store closures; 100,000 square foot shopping centers sold for the price of a London apartment, and failed matchups among the listed landlords. However, there are investors still buying retail assets outside London, where the issues are most acute. Who are the buyers and what are they buying?
The largest buyer is U.K. institutional investor M&G Real Estate, which has bought five properties for £594 million ($755 million) so far in 2018. The largest acquisition was a 50% share of a shopping center in Leicester for £236m from Hammerson, which is one of the retail-focused REITs that has seen its share price suffer this year as investors sell down their holdings in the sector. In a similar move, M&G also purchased a 50% share in a retail park near Edinburgh from the Crown Estate for £167 million. Both these assets sold at a 5.5% yield, showing investors will accept lower yields for the better quality assets.
Indeed, despite the negative publicity, transaction yields in the sector have continued to trend down and the average yield dropped below 6% for the first time in a decade in the third quarter of 2018. This indicates two things: firstly, it is the best quality assets that are selling and secondly that rent rolls have fallen (given the decline in the RCA CPPI for the retail sector over the same time).
Overseas players are showing less interest in retail than in other property sectors in 2018. They accounted for only 23% of acquisitions, compared with just over the 50% of the entire U.K. market. However, there have been a couple of new entrants: Korean investors KAIM and Hana Financial bought a retail park near Wolverhampton from KKR and Quadrant Estates for £175 million at a 5.2% yield. This deal is unusual because 90% of Korean money spent on all property types in the U.K. this year was in London, and it was the first Korean purchase of a U.K. retail asset that RCA has recorded.
We have reported previously on the emergence of U.K. local authorities as commercial real estate investors and the trend is still evident. RCA has recorded more than £1.3 billion of retail acquisitions by councils in the last 24 months. The latest is Croydon Council’s purchase of a leisure and retail park for £53 million. The council expects to generate a net income of approximately £1.4 million per annum, which equates to a yield of 2.5%. This is well below what might be expected for an asset of this type; however, the council states that it plans initiatives to increase the income level.
In a recent survey of over 350 real estate investors, developers and advisors published by law firm CMS, only 7% of respondents were positive towards retail real estate, whereas 74% were positive towards warehouse/distribution property. It is difficult to envisage a more startling illustration of the difference in sentiment between the two sectors, but it is clearly still possible to get retail deals done and some players continue to expand their holdings, perhaps sensing the “death of retail” story is oversold. Only time will tell whether they are making the correct call.