Investor appetite for retail property – and the prices they are willing to pay – has diverged in recent years between prime and secondary assets.
“We are still seeing the trend towards core and prime assets,” says Jeffrey Lefleur, managing director of WP Carey, the real estate investment trust. “I do not want to keep calling it a flight to safety . . . [but] I think there is still a level of comfort among institutional investors that core assets are a safe harbour.”
But with the prices of core assets rising, investors have started to look further afield for opportunities.
In the UK, capital has over the past few years tended to flow towards trophy assets in London and the South East. However, investors have of late snapped up shopping centres in regional locations outside the capital.
Among recent deals, Canada Pension Plan Investment Board bought a stake in Birmingham’s Bullring shopping centre, Intu, a UK-based real estate investment trust, acquired a mall in Milton Keynes for £250m and Norway’s sovereign wealth fund bought half of Sheffield’s Meadowhall shopping centre.
According to Charlie Barke, head of shopping centre investment at Cushman & Wakefield, the property consultancy, the increased demand has driven yields for regional shopping centres down from 5.5 per cent to 5 per cent.
David Lockhart, chief executive of NewRiver Retail, the real estate investment trust, says the difference in yields between primary and secondary shopping centres has been about 6 percentage points until recently. “Historically, it has never been that high,” Mr Lockhart notes. “[But] there is a perception now that there’s good value in the [UK] regions. Investors are realising that the [regional] retail sector, despite a lot of negative comments, is still very much alive and kicking.”
Simon Lee, co-founder and director of Osprey Equity Partners, a fund that invests in retail property assets on behalf of private investors, agrees there are opportunities in out-of-town shopping centres and retail parks if they are well placed and have a solid tenant base.
“If you found something that is in a good location, with good covenants, and you do your homework on it, you may see that the asset has been mispriced,” Mr Lee says.
One area that has remained resilient through the financial downturn has been food stores. Phil Cann, UK head of retail at CBRE, the property consultancy, points to strong growth in food store rents while noting that these assets have been particularly attractive to investors seeking income to meet pension fund liabilities.
Although the big supermarket chains have of late pulled back from opening very large stores – raising the possibility of fewer of these assets being available in the future – Mr Lee says the pipeline of new supermarket schemes is still there, even if the “sweet spot” for developments has moved to between 30,000 sq ft and 60,000 sq ft, compared with about 100,000 sq ft in the past.
“There is a healthy pipeline of new schemes coming through for pretty much all of the [food] retailers. [But] they are being more selective, and they are going for slightly smaller stores,” he says.
Appetite for new shopping centres, an area hit hard by the financial downturn, has also returned. “A number of schemes that had been mothballed are now being dusted off because there is retailer demand for them,” says Mr Cann.
British Land, the FTSE 100-listed property company, is among those looking at new retail developments.
Richard Wise, the company’s head of UK retail asset management and development, says: “It is wrong to say the retail development market is buoyant – it definitely is not.
“But we think that about now is the right time to start putting more time and effort into a retail development programme, which is what we are doing.”