Estates Gazette – Gavin Munn Market Commentary

By April 24, 2017News

The Following article appeared in the Estates Gazette:

Waiting for a Call

An imbalance in perceived values of UK shopping centres by both buyers and sellers means that deals could be few and far between this year…

“I’m wondering what a lot of investment agents are doing at the moment,” says Sovereign Centros chief executive and former Strutt & Parker investment agent Chris Geaves, while pondering the question of how many shopping centres might change hands in 2017.

“There will need to be a lot more ingenuity in bringing schemes to market – the days of waiting for brochures to land on desks are over,” he adds. The image of collective agent thumb-twiddling may not be that far-fetched. Research from Knight Frank shows UK shopping centre investment volumes barely topped £3bn in 2016 (see chart) and not even the most optimistic agent is forecasting more for the coming year. “There has been a big reduction in private equity players as the perception of future inward yield shift has gone,” says Knight Frank partner Charlie Barke. In other words, don’t expect to see Aldi/Lidl length queues to the checkout for shopping centres, at least in the first half of this year.

The least likely buyers are UK institutions (see panel). Barke believes they will be back in the game for malls by the end of the decade, but right now are “low on the shopping list”.Most likely to be heading towards the tills are overseas buyers. “We are increasingly seeing more coming from continental Europe, like German open-ended funds, as well as US players via asset management platforms,” says JLL head of UK retail investment Fraser Bowen.

A question mark hangs over local authorities – the surprise buyers of 2016. Suggestions that their activity will decrease this year are premature, says BNP Paribas Real Estate head of shopping centre investment Stuart Cunliffe, who points out that such deals often allow the public sector to drive urban regeneration plans forward. “As long as interest rates remain low and retail is expensive and difficult to develop, local authorities will want to be involved,” he says. In terms of product, buyers will be drawn to prime and super-prime centres. “These come up so rarely, there is no rationale for prices softening,” says James Findlater, head of shopping centre investment at Colliers International.

At the other end of the scale, district centres are attracting some interest (see box). Barry O’Donnell, head of shopping centre investment at Cushman & Wakefield, says: “There are ‘good secondary’ centres that have a future.” The centres most likely to suffer from tumbleweed years are those in the middle ground. While agreeing that prime assets will remain the target of investors, Savills associate director Toby Ogilvie-Smals says: “That chunk of the market [secondary non-dominant centres that need significant capital expenditure] is sliding down a slippery slope towards the cliff edge.”

So, will the agents have much to do in 2017? Strutt &Parker partner Gavin Hendry is sanguine. He says: “We will continue advising and creating deals that may or may not come through. There are 20 to 30 schemes which could come to market tomorrow, if there wasn’t an imbalance in pricing.”


Investor insight: CORDATUS REAL ESTATE

UK fund manager – Niche fund management company Cordatus has recentlybought assets in Whitley Bay,Tyne & Wear, and Bingley, West Yorkshire, for the initial £150m round of the Cordatus Property Trust – and expects to do more of the same. “Our plan is to invest in lot sizes of £3m-£15m and deliberately fly under the radar of the big companies,” says director Gavin Munn. “Those smaller lots sizes tend to give better returns.” The downside of smaller centres can be a plethora of small tenants to manage, though even here there are silver linings. “Annual rents are only around £20,000-£30,000, so if there is a void, someone is likely to be able to fill it easily,” says Munn.

One of the big attractions of small district centres is that they are resilient to economic change. Shoppers come for essentials that they are unlikely to buy online, possibly two or three times per week, rather than a large single shop. For this reason Cordatus places neighbourhood centres at the low end of the risk spectrum. “Yield compression is likely to be limited, so we are looking at income, though growth won’t be dramatic,” says Munn.

Unlike Capital & Regional, Cordatus is likely to be looking anywhere in the UK apart from the South East for its future district centre purchases. “We are very happy looking where others aren’t,” says Munn.

Article written by Mark Simmons of EG