At the centre of investment

The rush for prime office property that has characterised the commercial market recovery in previous months has slowed in recent months. As ever investors are now searching for the next sector to profit from. And judging from the actions of various investors, the area to be considering currently is shopping centres.

In the UK market almost £1bn has changed hands in this area of property, proving a major trend in the property market for the first half of the year. Primarily this has been through real estate investment trusts (Reits) led by the Australian Government’s Future Fund buying a third stake of Birmingham’s Bull Ring shopping centre in the autumn of 2009.

Surprisingly though, a number of local councils have also been keen to seize on the investment opportunities offered through shopping centre sales. Illustrated by the sales of the Catford Shopping Centre in Lewisham by St Modwen for £11.52m and the purchase of Wolsey Place shopping centre by Woking borough council, purchases can be seen as an investment both into property and into local areas.

It’s not necessarily shares in large developments that are of interest. While the likes of Westfield and Bluewater remain attractive (if expensive) investments, regional and local centres are proving an enticing investments. Meyer Bergman Retail Partners recently bought a 50 percent share in The Bentall Centre in Kingston-Upon-Thames from Aviva Investors, at a cost of around £130m, and it is expected they will also complete a deal for a share in an Ilford shopping centre as well.

Similarly, Capital & Regional have recently sold off the Aberdeen Shopping Centre to a client of Rockspring Property Investment Managers. The sale of the 220,000 sq ft shopping centre, whose tenants includes HMV and Waterstones, was recently completed at £47.4m.

Several conditions are driving these deals. To start with, there’s the unprecedented opportunity for buying shares in retail projects. Though some owners left the market as soon as the downturn began in 2007, most have weathered it through. Yet for some owners the financial strain has finally become too intense, especially considering the tough times retailers have had recently. As prices have begun to recover, these owners now see this as the time to cut and run.

Other developers have taken the same action based on the opportunities available in the current market. With profitable short-term developments becoming available through the current reduction in the price of property, the slow recovery of the retail sector is not necessarily seen as the best way forward by some developers, eager instead for new challenges. This was the reason given by St Modwen for the sale of the Catford Shopping Centre.

Timing has proven to be the key to sales. Developers are keen to snap-up opportunities existing in other areas of the market. Yet Reits generally have a longer time frame to contend with for their returns, and thus can ride out the current economic conditions to turn a profit.

In addition many property funds are finding themselves with an abundance of funds as investors use Reits as a way of avoiding the turmoil of the financial markets. This puts Reits in a position to capitalise on such investments where others can’t.

The strength of property acquisition as a position, as opposed to six months ago, reflects the state of the market and the situation of the construction industry as a whole. With the recession over and a small amount of growth returning to the market, confidence in such transactions is greater than any time in the past few years. In contrast though, prices on the whole still reflect the lack of interest in the market, making purchasing cheaper.

Additionally, while shopping centres and outlets offer a steady stream of income, the situation will improve further as the market picks up. The construction industry has been hit hard during this recession, and as such development has stagnated. Retailers on the other hand are currently in a far better position and many are now planning expansion to take advantage of the gaps left by insolvent rivals.

However, it is likely to take a long time for the construction industry to catch up with the demand for new retail facilities. The result will be that those who have prime retail space to let will begin to find demand for the space they have.

This will involve a period of time as retailers take up the slack of vacant units left by those who have gone bust. Where this is the case (and some centres have remained completely let) the situation will not last long, with signs are that the market is already turning.  

For vindication of this, one only has to look at the current action of retailers themselves. The downturn hit retailers hard early, as the general public reacted to the recession through a spending clampdown on everything but the essentials. Retailers that weren’t strong enough to survive this went to the wall. Those strong enough took courses of action to strengthen their position. Now they are ready to rebound.

As an example the failure of Zavvi, the music and DVD retailer, led to its main rival, HMV, taking over 32 of its stores across the country in the run up to Christmas 2009 and is showing continued interest in expansion. Fashion retailer H&M has also indicated its intention to open new stores and are currently the front runners to take up a prime outlet, in a prime location in the N1 Shopping Centre in Islington, formerly owned by Borders book shop .

Prime vacancies such as these will only last so long though. Once they’re gone, the demand for new retail space will be intense. And with no new developments currently in the pipeline the demand for space could become intense, putting owners in a good position to increase rents and increase profitability.

Equally, those currently in the position to sell retail space are finding that the market is very different to 12 months ago. Jones Lang LaSalle report that yields from retail space in London’s West End has risen by over 4 percent. This is, of course, a reflection on a high status shopping street rather than retail hubs or indeed the general high street. Yet shopping centres have largely outperformed the trend of the high streets, where the vacancies have been running as high as one in five shops. Yet the failure of the high street comes at the benefit of shopping centres and outlets who pick-up the people traffic diverted from the lack lustre high street. Thus, the value of shopping centres should, in all likelihood, rise as a result of demand for retail space.

Of course, shopping centres also support other businesses associated with the retail experience, bolstering any investment made in a shopping centre. Cinemas, for example, have been very profitable, experiencing a 32 percent rise in ticket sales in 2009, buoyed by the release of 3D films. So great is their power to draw the general public, even the gigantic Westfield shopping centre in London’s Shepherds Bush has recently opened a multi-screen complex which will likely have the effect of boosting footfall in the centre.

Fast food chains have also ridden out the storm of the recession in impressive style, going from strength-to-strength to meet the needs of a penny-pinched British public. Often central to retail centres, fast food retailers have acted as fail-safe profit maker for shopping centre owners.

And this industry too is in a phase of expansion. Snack retailer BB’s coffee and muffins announcing it plans for 20 new stores for the coming year, despite only recently coming out of administration.
 
Finally, shopping has become an experience for people; a means of relaxation and enjoyment. Clever managers take further take advantage of this through the hosting events linked to television events or music performances, turning centres into attractions and drawing more customers through their doors.
 
With the options and benefits available, it is not thus surprising that those who have the type of money required to invest  in shopping centres are doing so. With rents likely to increase as this year goes on, value too will improve. The time to get the best deals therefore is now.