The key feature of the first half of this year has been the sheer weight of money being deployed into the property market by the opportunity funds and mainstream UK institutions. As a consequence of these capital inflows large lot sizes, and in some instances portfolios, are the only way to invest the money quickly and efficiently. In the retail sector, shopping centres and retail warehousing have therefore been the main focus and unless a high street block is over £10 million it scarcely registers on these buyers radar.
However, it would be wrong to conclude that institutional money is no longer buying high street property, although at the present time this capital is reserved for only the very best opportunities. In particular prime, well secured rentally ‘rebased’ shops with long leases in the UK’s top 50 towns. Those vendors who have spotted this fact are enjoying premium returns.
With the weight of demand pushing up the price of shopping centres and retail warehousing (and offices and industrial) we would expect more capital to start to flow into high street stock, especially if it starts to look cheap relative to the other sectors. In short, there continues to be downward pressure on high street institutional yields driven in part by the lack of stock.
The disparity is that high yielding more asset management intensive property is still struggling to find a home. The uplift in sentiment at the end of last year has helped, and the banks are now at last willing to offer finance. However, property companies must be warned that if they think there is a strong enough market now, at last, to sell difficult assets they need to think twice as the number of buyers for secondary stock is still limited.
At least investors are now beginning to understand how retailers blend high street shopping with their online capabilities and whilst occupational demand for the very best shops is better than it has been, the supply/demand balance in all towns needs to be considered carefully before entering the market.
In conclusion, demand at both the institutional and property company end of the market is beginning to improve but the weight of demand and depth of demand for secondary assets is still fragile and accurate pricing remains crucial to achieving sales.
The busy end to last year left many investors anticipating a quicker improvement in pricing and therefore there has often been a reluctance to sell in the expectation that a property will be worth more later in the year. With a slightly stagnant secondary market we see many investors attempting to now “bite the bullet” especially with an expectation of an increase in interest rates and an early election next year.
Interestingly, some of the money being deployed has focused on large shop portfolios with Projects Tree, Minard and Moon all finding buyers who will ultimately look to sell down in the next few years. This could suggest that prime shops in second and even third tier towns could now present good value and when you look at the yield profile that some shopping centres in fairly nondescript towns are achieving this could definitely be the case.
We certainly believe that a window of opportunity exists to invest in prime shops in the £3-10 million bracket where ultimately institutional money will return.
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