The uptick in market sentiment that we reported in the third quarter of 2013 turned into more of a frenzy of activity as we headed towards Christmas.

The funds came under pressure from new capital inflows placing downward pressure on yields in all sectors of real estate including high street retail. Institutional activity continued to focus on only the best stock. With polarisation by occupiers toward only the top UK towns, and prime locations in those towns, institutional activity followed resulting in yield compression. The evidence now clearly shows that prime yields have sharpened from 4.75% to 4.5%.

It goes without saying that to venture to the new benchmark yield level requires either established or anticipated letting activity delivering rental evidence showing growth, something that is now starting to happen across many towns in the UK as historic rents default to their new datum point. Nationally speaking rents continue to decline and as a broad rule the further from London and the UK’s major cities you go the higher the rate of that decline. It is our view that a proper national rebasing will not have ‘washed through’ until 2015-16 and in many towns especially in the north of the country, where decline has been significant, it will not be until after the 2017 rating revaluation before rents are able to grow into the space left by the anticipated rates reduction.

At the riskier end of the spectrum with the exception of only one or two property companies few have looked at the riskier “workable” end of the market and we do not see that situation changing dramatically in the short term.

The private investor remains cautious and whilst it is clearly encouraging to see an improvement in sentiment it is a brave valuer or selling agent who becomes over-excited that their asset is worth much more today than it was last year. This year should be the year when the spotlight falls again upon the riskier end of the market, however, we do not anticipate that the private investors will venture far beyond vanilla shops let to substantial covenants with more than eight years unexpired. Even though we are now over five years into the new financial world, many property companies are still feeling real pain as they either extend their debt arrangements or fall into the hands of the banks and now the opportunity funds who have released the debt liability so effectively from the banks. In short, under the surface most property companies are still trying to survive and work out how to keep the banks at bay so that they can live to recover from the recent onslaught. Until genuine new debt providers arrive offering money at margins and rates that show value we do not foresee the end of distressed sales just yet.

Savills high street team sold and bought just shy of 50 assets in 2013, in almost as many towns. This gives us an unrivalled national market intelligence and more importantly a detailed database of buyers. From secondary locations in smaller towns through to some of the most ground breaking prime institutional transactions, Savills were involved.

Taken from
UK Shopping Centre and High Street Bulletin Q4 2013