Savills World Research UK Retail
UK Shopping Centre and High Street Bulletin Quarter 4 2012
Image: Meadowhall. SUMMARY
■ We believe that 2013 will see a ■ In the high street investment market turning point in the UK consumer the challenge will be to find locations “This year will continue to economy. Inflation will slow, earning and investments where the base rent will rise and confidence should follow. offers growth potential. see a widening gap between the strong and weak trading ■ The big challenge for landlords in 2013 will be retaining their tenants. locations across the UK” Landlords need to take a flexible attitude to lease negotiations and review spending on their schemes.
■ 2013 will see more high quality shopping centres coming to the market. It will also see investor demand expanding to include "value- add" opportunities.
savills.co.uk/research 01 UK Shopping Centre and High Street Bulletin
The consumer economy poor-performing stores than can be in 2012 in 44 deals, both well below A tough year for the UK consumer closed, and this will undoubtedly be a the respective long term averages of ended on a typically subdued note with continuing theme in 2013. However, £3.7bn in terms of transactions and 77 consumer confidence sliding back to the end result of such reviews tends to in terms of number of deals. its recent level of significant negativity, be less dramatic than the aspirations, and retail sales growth marginally and with rent continuing to fall in many The average initial yield in Q4 2012 contracting month-on-month in locations we expect the profitability moved out to 9.06% (from 8.16% December. of those locations to be enhanced in Q4 2011), which is a continued during 2013 as the consumer economy reflection of the stock being sold. However, there are reasons to be recovers. more optimistic about 2013, with Notable transactions in Q4 2012 UK economic growth forecast to be This year will continue to see a included: stronger at 1.0%. A further positive widening gap between the strong and ■ Acquisition of a 50% stake in boost will come from continuing weak trading locations across the UK, Meadowhall, Sheffield for £762.5m, growth in real incomes, which will and this will be reflected in the retailer reflecting 5.09% initial yield, by Norges be boosted by falling inflation and demand, trading, and ultimately the Bank IM the September 2011 indexation of rents that are being paid. We expect to state benefits up by 5.2% While CPI see continued expansion amongst the ■ Acquisition of The Lanes, Carlisle inflation has fallen significantly during coffee shops, discounters , footwear for £64m, reflecting circa 7.60% net 2012, it still remains some way above and luxury clothing retailers, as well initial yield, by F&C REIT its target. However, high food and further but slower expansion by the domestic energy prices will delay its smaller concept foodstores. ■ Forward sale of Westfield Bradford fall until the second half of this year. for £210m, by Meyer Bergman These requirements will be heavily Thus, by the end of 2013 inflation will biased towards the aforementioned ■ Acquisition of Metquarter, Liverpool be back to its 2% target, and this will strong trading locations, with rising for £21m, reflecting 9.00% initial yield, mean that real earnings growth will vacancy rates in the weaker markets by Columbus UK Real Estate Fund LP be back in positive territory. This will almost inevitable. Another theme combine with improving output and for this year will be the impending ■ Acquisition of a portfolio of five employment data to rebuild household bulge in lease expiries and the level of shopping centres for £85m, reflecting confidence and reduce the perceived over-renting across the UK. While the 9.7% yield, by New River from need to precautionary save knee-jerk reaction to this might be to Threadneedle. expect a large scale release of space and a downward re-rating in rents, the There are currently: The retail occupational majority of tenants are likely to renew ■ 24 shopping centres under offer market (albeit with a renegotiation of the rent in for £1.1 bn (based on quoting capital The final quarter of 2012 was one of the majority of locations.) value) mixed fortunes for UK retailers. Our analysis of the Christmas trading The big challenge for landlords will ■ 16 shopping centres in the market statements show an average increase be to continue to retain their tenants, accounting for £1.3 bn (based on in like-for-like sales of 1.9%, but the and while a flexible attitude to lease quoting capital value) continuing pain on the high street was negotiations will be vital, we also highlighted by seemingly inevitable believe that there needs to be a return Shopping centres in the market of slide into administration by Comet, to investment in retail assets. IPD data particular interest are :- Jessops HMV and Blockbuster. We shows that the day to day investment ■ Legal & General marketing 100% expect large parts of these portfolios to in shopping centres has fallen to very interest in Midsummer Place, Milton be taken up by phoenix companies or low levels and this is hastening the Keynes for £230m, 5.50%. new occupiers in the next 6-9 months drift of some centres from secondary to tertiary. With retailers reviewing ■ Wereldhave are selling their two While 2012 saw retail sales grow at their options on a regular basis, UK centres – The Broadway Centre in their fastest level since 2007, retailers schemes that are decaying due to lack Ealing is under offer to British Land and continue to battle against a highly of attention may well suffer from an Dolphin Centre, Poole is under offer to price-conscious shopper, and rising outflow of retailers. Legal & General, both for sums below rates and service charges. We believe the levels paid 12 and 24 months ago. that in 2013 the industry as a whole Shopping centre will have to think about rates and investment ■ The rumoured sale of a 25% service charges, and consider how The final quarter of 2012 saw interest in Trafford Centre, Manchester better these costs might be dealt with 14 shopping centres transacted by Capital Shopping Centres. so as to support the growth of the UK accounting for £1.22 bn, almost double retailer. the £634 m transacted in Q3, although We believe that these three sales mark the Q4 figures are skewed significantly the trend in 2013 of more institutional The majority of retailers that we by the sale of a 50% interest in and better quality schemes. The larger speak to are undertaking portfolio Meadowhall Shopping Centre. This ones, over £150m, are targeting the reviews, with the aim of identifying resulted in £2.72bn being transacted increasingly active Sovereign Wealth Funds from around the world. This is
02 Quarter 4 2012
in line with our thoughts from 2011 that buyers around, and in some towns the short term until the markets have it is the “time for prime”. Despite this none, there was often insufficient properly re-based, possibly by around the remains active demand across the competition to drive prices to the 2015. The secret is to buy off new range of quality from institutions, REITs, levels at which many property low base rents so that when growth opportunity funds in joint ventures, companies, funds and even the does start to come through values will property companies and debt buyers. banks were prepared to sell. In increase immediately. With shorter We believe that these trends will the last quarter institutional buying leases now very much the market continue into 2013 although the post was orchestrated by the valuers. norm, demand will polarise toward Christmas trading feedback will have No fund manager wants to buy an the best units in the best locations an ever more important role in investor asset, however good its long term and we are already seeing situations confidence and transaction figures. potential, if the valuation is going to where competitive bidding is returning. be immediately marked down before Where a shop is overrented (the rent Key statistics for Q4 2012: year end. It is only right that a fund being paid is in excess of the current ■ Average lot size £135.7m manager looks to defend their year market rental value) the question will ■ Average yield 9.06% end performance as that performance be how long will it take for the market ■ Average lot size £57.38m may be crucial to winning new money to recover to surpass that level if at in the year to come. all! Savills are advocates of buying Key statistics for the whole of 2012: overrented shops only if we believe ■ Average lot size £75.55m Overrenting and its real impact on that the supply/demand characteristics excl Meadowhall £55.92m value has finally come to roost. will see that overrenting ‘wash out’ in ■ Largest lot size £762.5m Accurate reading of the occupational the short term and the yield reflects ■ Average yield 8.11% market and the rental tone (net of the risk. ■ Highest yield 16.1% incentives, not headline) has become a (Greywell, Havant) crucial skill. Furthermore with tenants The other aspect that determines value ■ Lowest yield 3.3% still dictating the terms on renewals, is yield. With the occupational markets (Whitgift, Croydon) valuers have been valuing short still in turmoil there is an argument that unexpired terms ruthlessly. prime high street yields should move outward from the prime rate of 4.75%, TABLE 1 Having assessed the last quarter at least in the short term. However a Shopping centre yields everyone is now looking forward to lack of good prime stock and strong what will happen in the retail world private demand will we believe keep during the course of 2013. What is pricing steady. With the institutions Q3 2012 Q4 2012 clear is that the retail revolution is now relatively quiet now, is an excellent time well under way. The canny investor for private buyers to buy prime shops Super-Prime 5.00% 5.00% must follow new retailer trends avidly. often with little competition. Prime 5.50% 5.50% What is clear however is that as the
Town Centre Dominant 7.00%+ 7.00%+ online shopping market expands the There will also come a point where requirement for the same number secondary stock turns a corner and Secondary 9.00%+ 9.00%+ of unit shops as was historically the prices begin to improve. However Tertiary 14.00%+ 14.00%+ case is less. Retailers store sizes at the moment for an investor who are also changing to reflect modern wishes to opt for safety rather than Source: Savills display and stock requirements. There risk, prime shops in strong towns are is arguably less need for storage the way forward. space in shops but retailers still wish to present their product in good In conclusion 2013 is highly likely to be sized well configured stores with less higgledy piggledy and more topsy High street investment enough retail ‘theatre’ to appeal to turvy! In the last quarter of 2012 the high the customer who may then make the street investment market continued in purchase online. a cautious manner. The gap between a seller’s price expectation and that of a Investment agents without an buyer widened causing the market to occupational agency background, stall further. Institutional activity from or without occupational agency the retail funds remained selective, support, can only broker rather than on the buying side, and with little advise clients. Understanding the pressure to sell, limited on the selling occupational side of the business is side. Private investors led the charge crucial to understanding current and, on the buying side realising that they more importantly, future rental growth could pick up institutional calibre stock trends. with less competition from the funds. However with the debt markets still Two elements determine value, both of essentially closed cash remained king. which must be considered based on the supply and demand characteristics The challenge for everyone was of the moment. The first is rent. Rental judging price accurately. With so few growth is likely to be flat at best in
savills.co.uk/research 03 UK Shopping Centre and High Street Bulletin
GRAPH 1 GRAPH 2 Shopping centre investment volume Shopping centre yields 10.00%
10,000 100 9.00% 9,000 90 8.00% Volume 8,000 80 Avg Size 7.00% 7,000 70 6.00% 6,000 60 5,000 50 5.00% 4,000 40 4.00% Volume £m
3,000 30 Average Size £m 3.00% Savills Avg 2,000 20 IPD 2.00% 1,000 10 Savills Prime 0 0 1.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0.00%
Source: Savills Source: Savills
GRAPH 3 GRAPH 4 Christmas 2012 LFL sales Christmas 2012 LFL sales
Dixons Dreams House of … Marks & Spencer Waitrose Dominos Debenha… WM Morrison Next JD Sports Booker … Greggs Moss Bros Argos French Connection Dunelm Co-op Tesco Homebase Topps Tiles Majestic… Halfords Mothercare Sainsbury 0 2 4 6 8 10 -5 -4 -3 -2 -1 0 LFL % Source: Retailers, trading periods differLFL % Source: Retailers, trading periods differ Savills Retail team Please contact us for further information
Nick Hart Mark Garmon-Jones Jeremy Lovell Matt Salter Shopping centre investment Shopping centre investment High street investment High street investment 020 7409 8837 020 7409 8950 020 7409 8745 020 7409 8019 [email protected] [email protected] [email protected] [email protected]
Dan Peake Peter Barker Jonathan Stott Mat Oakley Agency Agency Professional Research 020 7409 9967 0161 244 7704 020 7409 8167 020 7409 8781 [email protected] [email protected] [email protected] [email protected]
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