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Funds and lenders hamstrung by retail changes

By Paul Norman - Wednesday, June 13, 2018 13:47

Profound changes in the retail sector and the recent spate of portfolio culling and administrations is making it increasingly difficult for commercial real estate investment funds and lenders to deliver competitive returns or loans, a leading academic has warned.

Dr Nicole Lux, who oversees the Cass Business School's UK industry standard Cass Lending Survey, flagged a number of structural factors that have already dampened real estate investor and lender appetite for the sector.

According to the most recent Cass Lending Report, which CoStar reported on here, lenders have £25bn of debt outstanding to the retail property sector, representing around 20% of the secured real estate debt market in 2018. That figure is down from the £55bn of outstanding debt focused on retail property in 2007 in the lead up to the global financial crisis.

According to Cass one third is held by UK Clearing Banks and maturing within the next four to five years.

Lux said the spate of bad news coming from the High Street and in particular the disappearance of famous names is driving structural changes that are making it increasingly difficult for real estate investment funds and lenders to get to a position where they can operate in the sector.

In a statement Lux said: “The fundamental changes in the retail sector are affecting real estate investment funds as well as lenders. House of Fraser is a huge retailer who has announced its cutting its existing leases by 25%. Retail rents are falling and landlords have to increase tenant incentives, making it more difficult for fund managers to deliver investment returns for retail portfolios.

“Some investors still believe in short-term headwinds, but the sector is shifting fundamentally. Lenders already commented in the last Cass Lending survey that they are not willing to lend to regional or secondary shopping centres, or high street retail property in a regional city. Especially, a shopping centre where there is already more than 15% vacant retail spaces is quickly going to deteriorate further in value.

“Of course for some investors, these will be investment opportunities, but turnaround strategies are highly risky and investors should question their fund managers’ capabilities before investing.

Lux said that aside from dealing with insolvency and potential loan payment issues, the "biggest impact will come from the deterioration of credit of these big retail names and reductions on leases, which will lead to a ratings decline under weaker slotting of these loans which means an increase in risk capital from 70% to 250%. This will make the loan more costly for the bank".

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