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. The exceptions are assets, usually shopping centres, with potential for repositioning, on receipt of adequate capex and suitable asset management, which 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.”
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.
James Bladon, Associate Director at DTZ in Birmingham, commented: “In the West Midlands, the retail investment market followed the national trends in Q2 2011. Investor demand has been very much focussed on prime assets with retailers concentrating on prime retail locations/units due to the pressure from reduced consumer spending and online competition. Similarly, UK institutions have been the most active type of investor across all three retail sub-sectors in the region.”
Transactions in the West Midlands are estimated to have totalled £185m in Q2 2011, significantly higher than the total for Q1 2011 and comfortably above the corresponding quarter in 2010. Key transactions included: Orchard Street Investment Management’s £33m purchase of Three Spires Shopping Centre in Lichfield, where Development Securities has also agreed a joint venture with S Harrison Developments to develop the 395,000 sq ft Friarsgate shopping centre; Invista’s sale of its 50% stake in The Fort Shopping Park in Birmingham in four 12.5% tranches to four different institutions (Aberdeen Asset Management, Henderson Global Investors, Merseyside Pension Fund and PRUPIM) for a total of £108m; DTZ Investment Management’s £40m purchase of St Johns Retail Park in Wolverhampton and LaSalle Investment Management’s £16m purchase of the Caxtongate Phase 2 High Street scheme on New Street, Birmingham.
James Bladon added: “Looking forward, it is likely that activity will remain strong in Q3 2011, with the Kingfisher Shopping Centre in Redditch currently being marketed for £150m.”
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.
