Secondary suffers as shoppers, retailers and investors focus on prime

Q2 2011 saw investors battling for increasingly scarce good-quality, well let retail assets, as the gulf between prime and secondary stock continued to widen under pressure from constrained consumer spending, according to DTZ’s Q2 Retail Investment Market research.

Institutional investors once again drove shopping centre, high street and retail warehouse transactions.  However, in the face of weakened occupational demand, retailer administrations and widespread downsizing, their focus was on prime, and appetite for riskier secondary assets remained low.  Assets with potential for repositioning, on receipt of adequate capex and suitable asset management, are attracting attention from private equity buyers.  Pricing is an issue here, however. 

With banks stepping up their workouts, and institutions avoiding non-core properties, secondary high street stock saw yields continue to shift outwards in Q2.  As retailers carry on narrowing their focus to prime locations where footfall remains high, and with trading conditions unlikely to improve over the next quarter, secondary high-streets and shopping centres will have to contend with increasing vacancy rates as occupational demand continues to fall. 

Martin Davis, Head of UK Markets Research at DTZ, commented:  “The decline in consumer spending and disposable income is impacting the occupational market and putting pressure on rents payable.  Ailing retailers looking to downsize are likely to retain their prime locations because they will bring in more money – despite the higher rents.  Retailers will be able to justify the rental costs because consumer spending in these prime locations is so resilient.  As a result, the rental growth performance of secondary retail assets is deteriorating compared to prime.” 

Philip Glenn, Head of DTZ’s Nottingham office, commented: “The East Midlands picture mirrors the national one with difficult trading conditions across the sector. From an investors perspective prime stock is scarce. The East Midlands has a strong retail offer with relatively recent shopping centre developments in both Leicester and Derby. Nottingham retains its position as one of the strongest retail destinations nationally and the recent announcement of plans to extend the Victoria Centre further is a vote of confidence for the city.”
DTZ’s Q2 Retail Investment Market research shows that prime yields have remained stable across the retail investment market during the second quarter.  However, DTZ anticipates that the gap between yields on prime and secondary shopping centre stock, in particular, will widen due to the imminent completion of a number of significant asset sales, which will provide evidence for this trend.

Looking ahead to Q3 2011, DTZ anticipates that REITs will take a more active role in the shopping centre and retail warehousing markets, while institutions will continue to be the dominant force in the high street investment market, paying aggressive prices for prime stock.  Furthermore, availability, pricing and cost of debt will be crucial for private equity chasing secondary shopping centre assets, as the market is increasingly influenced by the banks and the evaluation of their loan books.