Q2 2021 Retail Investment knightfrank.com/research Update Green Shoots Emerging RETAIL INVESTMENT UPDATE RETAIL INVESTMENT UPDATE WHAT YOU NEED Key Transactions - 2021 TO KNOW… Shopping centre Sector Purchaser Vendor Price NIY % Hammerson Portfolio Retail Warehouse Brookfield Hammerson £330m - Touchwood, Solihull Shopping Centre Ardent* Lendlease £90m 9.50% Centre Court, Wimbledon Shopping Centre Romulus Construction Aberdeen Standard Investments £71.5m 5.90% Retail Warehousing Shopping Centres High Street A1 Retail Park, Biggleswade Retail Warehouse British Land Aberdeen Standard Investments £49m 8.50% Increased investor demand is Pricing for relevant schemes – prime Strongest demand for historic prime Monument Mall, Newcastle High Street Rueben Brothers Aberdeen Standard Investments c. £37m c. 7.40% compressing yields experiential and local convenience – assets let to secure, rent-paying tenants Sainsbury's, Ealing Foodstore IM Properties Aprirose* £33.7m 3.45% starting to stabilise Beacon Retail Park, Knight Frank Investment Strongest demand for rebased, Better liquidity for smaller lot sizes Retail Warehouse Nuveen £23.2m 7.38% Milton Keynes Management* discount-led parks Valuation write-downs opening the The Spires, Barnet Shopping Centre BYM Capital AIMCO £28m 6.70% door for re-purposers High NIYs accounting for overrent Selective UK Funds back in M&S, 72-76 Queen St, Cardiff High Street Topland M&G Real Estate* £23.25m 6.42% the market Bank led sales risk flooding the Buyers attracted to alternative Lidl, Weybridge Foodstore CBRE Global Investors Aviva Investors £12m 3.66% market later in the year use potential *Advised by Knight Frank Foodstore yields hitting new lows All schemes rebasing to potentially attractive new levels THE YEAR SO FAR… Transaction Volumes - YTD 2021 Occupational demand is improving With the moratorium over tenant trading conditions, should see a with well-capitalised tenants evictions extended to March material improvement in collection Shopping Centres Retail Warehouse High Street Foodstores beginning to selectively take space. 2022, many occupiers continue to rates now that retail is fully open Transaction This improvement is particularly withhold back-rent from periods once again. volumes prevalent in the leisure and discount/ of enforced closure whilst seeking essential retailer spheres. Leisure to opportunistically renegotiate Rents have fallen by 50% or more in £511m operators are gearing up for a summer leases. Retailer failures have slowed some centres and this is not a short- 18% reached bounce-back. Discounters/essential through 2021 with tenants aided by term correction. There may, however, £780m 28% £2.76bn in the retailers are capitalising on market Government support and the large be instances of over-correction and share gained during the pandemic and number of “at risk” occupiers failing rental growth is possible (albeit from first half of the attractive rental terms on offer. earlier in the pandemic. We expect a very low base). to see these failures grow again as £429m 2021, up 80% E-commerce market share has retailers’ running costs dramatically Investors are cautiously returning 16% continued to steadily decline from increase as staff come off furlough to the retail sector, buoyed by high from £1.54bn its February 2021 peak, following the and the business rates holiday ends. yields and prospects of a counter- over the same reopening of non-essential retail and cyclical buying opportunity. This ship consumers’ shopping habits adapting Rent collection continues to be is starting to sail with prime yields period in to the “new normal”. The February challenging with collection rates already under downwards pressure £1,040m 2021 high-water mark stood at 36%, ranging from 30%-60% during the in the Out-of-Town and Foodstore 38% 2020 with the latest data (May 2021) showing pandemic affected quarters. New subsectors. a fall to a more modest 28.50%. deals to return tenants to rent paying position (often by writing off historic Source: Knight Frank arrears), coupled with more stable 2 3 RETAIL INVESTMENT UPDATE RETAIL INVESTMENT UPDATE Sentiment is polarising between In- market. Administrators and banks, . Re-based, discount-led/bulky Prime Retail Yields Town and Out-of-Town retail. Whilst taking on secondary portfolios, are retail parks and solus units are most undeniably stronger towards Out- likely to be the largest source of stock sought-after, whereas the perceived Shopping Centres Retail Warehouse High Street Foodstores of-Town, we are witnessing steadily in 2021. UK Institutions and Funds riskier fashion parks are yet to witness 9.50% improving investment demand and have also been active sellers so far such inward yield shift. competitive bidding on selected city and we anticipate further stock from 8.50% centre assets, particularly where this ownership group as the year In all retail sub-sectors we are re-purposing opportunities exist. progresses. witnessing stronger liquidity for 7.50% Some investors, attracted to retail as smaller lot sizes. This is largely driven a market recovery play but no longer With retail historically being the by the lack of debt available to finance 6.50% able to compete Out-of-Town, are highest value use, the opportunity to acquisitions. Few lenders are willing turning to Shopping Centres and convert space to alternative uses only to underwrite retail acquisitions and 5.50% multi-let parades for higher yields/ existed in certain markets. However, those that are demand high interest 4.50% lower capital values. the crash in values of retail property rates (often 5.00%+) and low gearing (often 50% or more) has opened the (<50%), meaning many investors are 3.50% High Street demand stems from door to re-purposers looking for choosing to fund acquisitions with Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 HNW Private Investors and PropCo’s development opportunities. With cash. For this reason average lot sizes 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19 20 20 21 seeking historic, prime opportunities numerous assets trading at <£100 (excluding Out-of-Town /Foodstores) Source: Knight Frank at significantly discounted pricing. psf, conversions are becoming more are low and portfolio sales are scarce. Secure income and certainty of rent viable in locations where this was not are key drivers of demand. As such, previously possible. Demand for Foodstores is red hot shops let to banks, essential retailers and this market continues to set new and convenience stores are all The Out-of-Town market has seen records. Investors are attracted to the KNIGHT FRANK OUTLOOK… experiencing increased demand. a resurgence of demand from UK longer leases (often index linked) and Funds and, as we predicted in our stronger covenants than conventional Dramatic valuation declines have 2021 Retail Outlook, yields are under retail and we are seeing many UK caused debt covenants to be breached downwards pressure. Since the turn Institutions, REITs and overseas in leveraged portfolios. This has led to of the year, we estimate Prime Yields investors vying for new investment Significant stock expected to come to yields. We expect to see a further Retailer casualties to increase as a number of bank-led sales processes, to have hardened by 75bps but the opportunities. market in Q4 2021. We fear this supply 25-50 bps of compression by yearend, occupiers’ running costs dramatically particularly in the Shopping Centre polarisation of demand is marked. could overwhelm demand in some which will mean 100-125bps of inward increase as staff come off furlough areas of the In-Town market and yield shift over the course of 2021. and the business rates holiday ends. pricing could be impacted. E-commerce penetration to Bank-led sales processes to continue Despite a risk of oversupply, we continue to decline over 2021, in the Shopping Centre and High anticipate retail transaction volumes plateauing at <25%. Street sub-sectors. Transaction Volumes will surpass £6m in 2021, a level not Shopping Centres Retail Warehouse High Street Foodstores seen since 2017. Polarisation to become more severe We expect to see an increasing with prime, experiential and local, number of investors considering 14.00 The stabilising occupational market community retail assets to remain retail as a counter-cyclical buying 12.00 and low levels of stock will put further robust, but with the middle market opportunity as the year progresses. downwards pressure on Out-of-Town increasingly squeezed. 10.00 8.00 6.00 REIT Share Price Tracker 4.00 Value of transactions, £bn Landsec British Land Hammerson NewRiver Capital & Supermarket London 2.00 Regional Income REIT Metric Latest Share Price (p) 702 518 39 86 74 118 238 0.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Q1 - Q3 2020 Movement +6% +10% +69% +8% 0% +10% +2% NAV per share (p)* 985 650 82 151 150 101 190.3 Source: Knight Frank Premium to NAV -29% -20% -52% -43% -51% +17% +25% *Latest available published NAV per share 4 5 RETAIL INVESTMENT UPDATE RETAIL INVESTMENT UPDATE KNIGHT FRANK DEALS Riverside Retail Park, Northampton – acquisition The Moor, Sheffield – acquisition Over the past 12 months we have transacted over £1bn of retail assets across 58 deals and encompassing all retail sub-sectors. A selection of these transactions are shown below. Thank you to all those clients who have worked with us. April 2021 April 2021 Client: Melford Capital Client: NewRiver / PIMCO Price: £55m / 8.37%