The travails of The Local Shopping Reit, the only UK real estate investment trust to specialise in this area, shine a light on the health of the British high street.
The Reit – a type of quoted company that receives preferential tax treatment in return for paying out most of its income as dividends – was floated in a blaze of optimism at 177p a share in 2007. Its shares now trade below 30p as the rise of out-of-town and online shopping, combined with the crippling effects of the financial downturn in the UK, have taken their toll on the outlets in the trust’s portfolio.
New management has been drafted in to sell the portfolio, repay debt and return the remaining capital to shareholders. It turned out that investing in takeaway outlets, hairdressers and other shops in neighbourhood shopping parades was not a sure-fire route to riches after all.
Indeed, a report last year from the Distressed Town Centre Property Taskforce, an alliance of professional bodies, trade associations and representatives of the banking, retail, government and property industries set up in the wake of the government-mandated Portas review of the state of the UK high street, concluded the “horrific” impact of the recession meant many high streets had lost “their sense of purpose”.
So what does this mean for institutions that have invested in retail property such as Local Shopping – a trend augmented in recent years by an increasingly difficult search for yield?
The good news is that the sector still has its defenders. Chris Urwin, global head of real estate research at Aviva Investors, believes it is “overly pessimistic” to state that the high street is in terminal decline.
“Some people are talking about the death of the high street. What people have forgotten is that some of the downside has been cyclical rather than structural. We are long-term investors,” he says.
Mr Urwin believes the hoped-for economic recovery will allow shops to increase turnover even as ecommerce continues to boom.
Ed Jenkins, head of retail real estate at Standard Life Investments, sees chinks of light as economic growth returns.
Back in the “dark days of recession”, he says, more than 20 national retail chains approached his company asking to move from quarterly upfront rent to monthly. Such enquiries, Mr Jenkins says, have fallen to a “trickle”.
“Sentiment in the retail market is improving and the plight of most retailers in the UK seems to be stabilising,” he adds.
“Those that have gone to the wall recently have not had as much impact. They have been in secondary-type locations… not quality shopping centres.”
There is a widespread view that while humdrum high streets may struggle, primary retail space in popular shopping centres and retail parks – the space that institutional investors are more likely to own – will flourish.
Jim Garland, research analyst at Cordea Savills, the property investment manager, believes that as many retailers rationalise their portfolios to cut costs, there will be a shift to larger “destination stores” in prime locations.
“Fifteen years ago, a retailer needed 200 stores to have a pan-UK exposure. Now it is about 80,” says Robbie Duncan, real estate analyst at Jefferies, the investment bank.
Mr Jenkins, who manages Standard Life Investments’ £1.4bn UK Shopping Centre Trust, calls this “a polarisation of the market”.
“The bigger and stronger assets are getting bigger and stronger,” he adds.
A partial solution for some struggling high streets may be for disused retail units to be converted to residential use. Mr Duncan says that, typically, such a conversion would provide an uplift in valuation, yet he cautions that “in a lot of these towns with dying high streets, there is no demand to live there”.
There is a belief that the internet can sometimes be good for high streets. Online retailer Sofa.com, for instance, has opened physical stores to “showroom” its products and offer face-to-face customer service.
Overall, Mr Urwin at Aviva Investors is confident that the right property assets can still prove a solid investment. “For good assets in good towns, valuations have been resilient,” he says.
“Outside central London, retail is quite high yielding. We expect double-digit total returns for property this year and next, and for retail we expect good performance as well.”