Shopping centre transactions sink as buyers and sellers adopt 'wait and see' approach

By Paul Norman - Thursday, July 12, 2018 8:31

Shopping centre transaction volumes for Q2 2018 were 40% down compared to last year with local authorities at the heart of 50% of those trades, reports Knight Frank.

KF reports that deal volumes in the second quarter of the year were circa £290m, 28% lower than Q1 "characterised [again] by low levels of activity on both the buy and sell side due to the impact of the occupational market on investment decisions".

KF added that supply remains "low due to a 'wait & see' attitude and while demand remains low, investors are monitoring the sector".

Capital values fell nearly 4% in the 12 months to May 2018 with an average deal size this quarter of £36m, KF added.

KF said that "forward-thinking, proactive councils continued to acquire schemes within their jurisdictions, comprising nearly 50% of the total deal volume this quarter".

It said that there remains a "compelling argument for local authorities to continue to invest in their town centres, providing they are well advised on the asset and pricing, and appoint specialist management teams to deliver a clear business plan".

Mark Smith, Partner, Knight Frank, said: “Buyers and sellers are taking a wait and see attitude to determine where the market will bottom out before committing to transactions, but this masks a raft of discussion going on in the background.

“CVAs have changed the playing field and transformed a gradual evolution in the occupational market in to a sharp correction. Schemes with high exposure to retailers that carry the threat of CVAs will not trade until investors have more certainty over their futures.

“Valuers have woken up to this and accelerated the outward movement in yields. Rather than being resisted by landlords this is now increasingly being encouraged, to ensure closer alignment to market pricing and the ability to trade if desired.

“The Grimsey report, published last week, correctly highlights many of the issues in retail, but by its nature over generalises. There is too much retail floorspace in the UK and whilst the government can try to intervene, market forces will inevitably lead to the continued decline of certain locations.

“Unsurprisingly, the focus is on failing centres, but elsewhere many schemes continue to be very profitable for retailers, either providing experience or convenience for shoppers. Schemes with these attributes, along with the few that offer repositioning plays, will continue to offer potential for sound investment.”

A number of key players, traditional buyers of retail, are still committing significant capital to the retail sector despite its challenges, KF said highlighting British Land in Tunbridge Wells, DTZ Investors in Clapham Junction and M&G, which acquired a 50% share in Fort Kinnaird, Edinburgh from The Crown Estate for £167m.

KF added: "Demand for repriced, smaller lot size investments remains reasonable. Higher yielding community schemes, arcades and supermarket anchored precincts continue to see demand from private equity and propco investors.

"In contrast, investors remain cautious where centres have a department store anchor or a large proportion of fashion tenants as these are suffering most from CVAs.

"With asset valuations being moved out by most of the valuation houses and funds coming under increasing pressure to sell, Knight Frank expect to see a further sharp correction leading to improved liquidity over the second half of the year and through to 2019."

pnorman@costar.co.uk

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