Things can only get better for shopping mall investors

Posted by Property Week on 19th Jan 2018

Knight Frank figures showing that just 31 shopping centre transactions were completed in 2017 will not have come as a surprise to retail investment agents, many of whom were glad to see the back of an unusually tough year.

These deals represented less than half the average across all property sectors (64) and were worth a total of £1.6bn – half the 10-year average.

Strong institutional activity in other property sectors contributed to the lack of deals, as did differences in pricing expectations between vendors and buyers and ongoing uncertainty about the health of major retailers.

But this could be set to change. Both Knight Frank and JLL have forecast that volumes will hit £3bn by the end of 2018, and the year is off to a promising start after Deutsche Asset Management acquired Palace Gardens Shopping Centre (pictured) in Enfield, Greater London, from Standard Life, for a price believed to be around £50m.

“We think there will be more transactions this year, mainly due to increased buy-side interest,” says Morgan Garfield, partner at Ellandi.

In 2017, buyers and vendors struggled to agree on pricing, leading to 18 being brought to the market but failing to sell, according to the Knight Frank report, while others were quietly refinanced. But the defined time periods of funds means private equity investors cannot hold off selling forever.

“A lot of vendors have refinanced and they have taken equity off the table by doing that so banks will no longer give them the same rates,” explains John Griffin, head of investment at Lunson Mitchenall. “They can’t keep clinging on to their original exit plans: if they want to exit, they will have to talk to buyers at the level the buyers are at.”

Another factor that may help spur the market into action is the proposed £3.4bn merger between giants Hammerson and Intu. “If Hammerson and Intu are creating the biggest REIT in the UK, that gives confidence to the market – even to those investors fishing around at a more local level,” says Griffin.

Hammerson has not yet revealed its plans for the business, but it could look to dispose of assets in areas where it now owns two or more prime shopping centres – a position that one investor said would be “difficult to sustain”.

So if funds are selling, who will be buying? “There could be some new investors in UK retail, because the yields now look so out of kilter with other commercial investment classes,” says Garfield.

Councils are also likely to continue purchasing local assets, including Cherwell, which announced its intention to buy Banbury’s Castle Quay 2 for around £100m in late 2017; and Shropshire Council, which is set to acquire three small centres in Shrewsbury.

Community shopping centre owners are also set to be acquisitive. “We believe the definition of shopping centres as prime or secondary is oversimplified,” says Lawrence Hutchings, chief executive of Capital & Regional, which was involved in three of 2017’s transactions having acquired The Exchange in Ilford and having sold The Mall in Camberley and Buttermarket in Ipswich.

Vibrant centres

“What we are seeing in terms of footfall figures is that community shopping centres are very vibrant, in contrast to what the investment market would have you believe,” adds Hutchings.

Capital & Regional saw a 1.7% footfall increase in December 2017, compared with a 3.7% fall in the National Footfall Index, and is currently repositioning its assets away from fashion and toward non-discretionary purchases.

Another factor that may encourage vendors to reassess their expectations is the continuing problems being experienced at UK retailers, such as House of Fraser and New Look. As a bounce-back in retailers’ fortunes and consumer spending do not seem forthcoming, centre owners may take a view that pricing is unlikely to change for several years and decide to make a deal.

“Last year, there were few buyers and vendors were generally unwilling to adapt pricing to meet buyers in the middle – we think there may be an increased willingness to be flexible this year,” says Garfield, adding that Ellandi could acquire “selective assets” this year, having not previously done so since late 2015.

The next round of deals will be watched closely as investors try to get a feel for current pricing levels and demand. These could include GIC and Lendlease’s respective 25% and 17.5% stakes in the Bluewater shopping centre – which have a combined value of £1bn – as well as Cosgrave’s Liberty Centre in Romford, which is being marketed for £250m.

If Knight Frank’s prediction is anything to go by, there will be plenty more to come after that.

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