Investment in UK retail warehouses exceeded £550m across 30 deals during the first quarter of 2014, according to new research from DTZ.
The figures are well down on Q4 2013 when investor confidence returned with a bang to hit £1.53bn – half of 2013’s total market volume – but nonetheless represent a marked improvement year-on-year with Q1 2013 seeing just £200m invested across 11 deals.
Headline deals during the first quarter of 2014 included Quadrant Estates & KKR’s purchase of Gallagher Retail Park, adjacent to Junction 9 of the M6 motorway near Walsall, for £91m reflecting a blended 6.15% net initial yield (NIY). Similarly, Capital Shopping Park, Cardiff was purchased by Aberdeen Asset Management for £59.65m reflecting a 5.30% NIY.
Andrew Gibson, Associate Director at DTZ in Cardiff comments: “The sale of Capital Shopping Park at £3.15m over the asking price was extremely encouraging and proof the liquidity that had previously been focused on the South East has started to move into the regions. The weight of money in the market at present could see a number of other transactions of this kind taking place in Wales over the coming months, albeit the focus will be on well let assets in high-quality trading locations.”
Marcus Wood, DTZ’s Head of Retail Warehouse and Leisure Investment, said: “Improved market liquidity and higher investor confidence means prices for both prime and secondary stock are rising. This is being driven by weight of money rather than any tangible upturn in Estimated Rental Value growth. Yields have continued to trend inwards.
“Strong demand and weight of money is available for well let parks, particularly in the south east. This might be good for pricing in the short term, but tangible signs of real rental growth would be better in the long term.”
During Q1 2014, demand for retail warehousing was dominated by funds which invested £231m, 42% of all deals, with the likes of Aberdeen Asset Management, Schroders and M&G all active. Private Equity was also active, as illustrated by KKR’s involvement in the purchase of Gallagher Retail Park. This off-market deal also demonstrated that the largest capital values per square foot continue to be for assets with long income, strong covenants and a strong trading location. The retail park is in an exceptional location between the intersections of the M5, M6 and M54 motorways north west of Birmingham city centre.
At present there is a shortage of stock with only £137 million openly marketed. In addition to this there remains around £130 million worth of stock under offer. There are good levels of liquidity at all lot sizes.
The occupier market is showing signs of a reasonably resilient recovery with retail park vacancy rates at their lowest levels since 2007. It is moving away from a ‘tenants market’ based on soft terms to a more balanced sharing of power between landlord and tenant.
Jonathan Rumsey, Head of Retail Market Analysis at DTZ, said: “Structural problems still remain in the market, largely driven by retailers’ multichannel approaches. What was fit for purpose in the past is not necessarily fit for purpose now. On the whole food and DIY stores are getting smaller, there is strong discount demand and very strong catering and furnishings demand.”
Commenting on the outlook for the retail warehouse sector, Rumsey added: “Undoubtedly the deals to watch will be Morrisons’ disposal of £500m of its estate, confirmed in March.
“We forecast yield compression will slow in 2015, but capital values will continue to rise due the significant weight of money in the sector. If there is more stock released in the second half of the year it could take the heat out of the market. Any clear evidence of rental growth will support current pricing and further stimulate investor interest.”