The retail occupational market

Retailer performance has remained fragile in the second quarter of this year, with like for like sales generally weak in June and July on the back of rising concerns about the economic prospects.

While the flow of administrations has been gentler this year, La Senza, Jane Norman and Paul Simon have all slipped into administration in recent months. However, the big change that we have noticed is in demand for the stores that are being released by these failures. La Senza's portfolio is generally in high quality locations and retailer interest in these has been strong.

At the other end of the scale there has also been strong interest in some of the Paul Simon stores from discounters and bulky goods retailers. This trend emphasises the polarisation in the retail market at present, with a wide spread between those who are rationalising with no expansion, and those who might still be rationalising, but are also opening new and often larger stores.

The main topic of conversation in retailer boardrooms continues to be how to adapt to the multi-channel world. Increasingly this is now being seen as an opportunity rather than a challenged, with wider customer bases to play for, but the logistics of dealing with new forms of customer behaviour testing every retailer's store and distribution model.

Retailers such as Argos have proven the need for stores in this new environment, and the focus for many retailers is now how to encourage customers into their store via click and collect or when making returns. This then allows their staff to upsell and drive profits.

While the focus of the retail property industry is often on the next hot new entrant, with retailers such as Hema and American Eagle recently arriving in the UK, our opinion is that the domestic retailers offer far more potential for landlords who are looking to fill voids or drive rents. Now that many of the major multiples are looking to grow their portfolios to capture the economic recovery and service multi-channel sales, a 2% increase in store numbers for one of the major multiples will deliver far more openings than a new entrant who might have plans to open three or four stores in the next 12 months.

The most sought after locations are starting to see a slight swing in terms from the 100% tenant friendly environment that has prevailed in recent years, and we have noticed that many retailers are now prepared to pay the headline rent to access these pitches, and the incentives that landlords are prepared to offer are falling.

Looking ahead to the remainder of this year we expect that trading will improve, and many retailers are rushing to get new stores open in time for Christmas. Indeed, the success of the American style "Black Friday" promotions last year is leading a number of retailers to comment that the Christmas season has now extended, albeit with the need to offer some deep discounting to drive shopper excitement.

Shopping centre investment

The second quarter saw 15 shopping centres traded, accounting for a capital value of £1.487 billion, taking the first half total to £3.37 billion.

The average lot size increased to £123 million (up from £117 million in Q1), whilst initial yields moved in from 7.98% to 7.77%.

Notable transactions in Q2 2014 included:

• The acquisition of Bridges in Sunderland by AEW for £152.7 million off Land Securities (advised by Savills)reflecting a net initial yield of 7.1%;

• The acquisition of Golden Square Warrington by clients of LaSalle Investment Management off Legal and General and Lend Lease for £142.5 million reflecting 7% initial yield and 6.6% equivalent yield;

• The acquisition of Washington Square Workington by Europa/Scoop for £31.5 million reflecting a net initial yield of 7.5%;

• The acquisition of The Guineas Newmarket by Ignis for £18.29 million off Helical Bar (advised by Savills) reflecting 8% initial yield. The most significant transaction of the quarter was the acquisition by Land Securities of Lend Lease's 30% stake in Bluewater shopping centre. The stake included the asset management remit and as a consequence led to one of the most fiercely contested battles seen in many years.

The £654 million acquisition reflected a net initial yield of 4.1%, thereby bringing in super prime yields by 75-100bps.

There are currently 23 shopping centres in the market which are under offer accounting for £1.15 billion. Notable amongst these are East Kilbride (c.£170 million), the Swallowtail shopping centre assets (c.£350 million) and Telford (c.£150 million). Savills are advising on all of these assets.

There are 27 assets in the market accounting for £950 million.

As it stands if the assets currently under offer and in the market happen it will be a c.£5 billion year. We are aware of a number of assets coming through to the market in September and as a consequence it is not inconceivable that the year could reach c.£6-6.5 billion. This level of activity has not been seen since 2006.

Savills has been fortunate to have been involved in many of the transactions in 2014 and as it stands there is no evidence of a slowdown in investor appetite. We are in unprecedented times when all areas of the buyer spectrum together with the debt markets are seeking to deploy equity. It is well known that the top 50 private equity fund managers have raised $175 billion to invest in property since 2009.

As yields compress this will undoubtedly drive some investors out but as we have seen many of the opportunity funds are coming down the return curve with new "core funds" seeking 10% returns rather than the traditional 15% plus.

As net inflows increase for the institutions we are now seeing pressure on them to invest again. This has led to a number of institutional investors acquiring what would have traditionally been opportunistic assets.

Finally we are beginning to see a small inward yield movement on some of the better secondary assets. Many of these secondary towns have been resilient through the recessions but extreme caution must be taken in this sub sector and forensic diligence undertaken to determine sustainability.

Taken from
UK Shopping Centre and High Street Bulletin Q2 2014