2010 Spring - Chase and Partners
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Spring
Retail Repor t
2 010
Out-of-Town Market Snapshot
Retailers striking a hard bargain
Strength and Resilience
Supermarkets & Superstores bucking the trend
Light... After the Darkness
The remarkable turnaround in the investment market
In-Town Issues
Q &A on the state of the high street
01
Contents
“The concept that 02 Predictable Future?
Introduction by Graham Chase
property was a
secure, safe haven 06 Market Snapshot
Out-of-Town Agency
has been rocked to
10 Short Term Flexibility?
its foundations...” Occupational Marketplace
Predictable Future? 14 Light... After the Darkness
Inroduction by Graham Chase
Out-of-Town Investment
18 In-Town Issues
Q &A with Mark Paynter
22 Where do we go from here?
In-Town Investment
26 The Armageddon Argument
Professional
30 Strength and Resilience
Supermarkets and Superstores
36 Welcome to The New Reality
Town Planning
40 What’s been happening
2009/10
41 Who’s who at C&P
Key Contacts
Click on coloured band to go to section of choice
Return to Contents 03 Introduction by Graham Chase Predictable Future?... Some pundits are suggesting that this is the hardest market in which to make predictions – I disagree, the previous three years have been far more difficult and challenging. Anyone who has run a property-related business will know that the uncertainties that arose in the financial sector in the Spring of 2007 resulted in a string of corporate events which were inevitable but hidden in the fog of self- belief, perhaps encouraged by advice from the Chancellor of the Exchequer that economic cycles were consigned to the rubbish dump! The excesses of the banks and poor The retail occupier sector has mirrored investment and lending policies; borrowing the harshness of the recession as the high short on wholesale money markets to lend street has average vacancy rates nearing long in retail mortgage markets and failings 15% outside central London and parts of the of the credit rating agencies, have again put South East. It has been a lonely and cold the property sector and its security as an winter, not helped by inclement and freezing asset base under pressure. The concept that weather conditions. property was a secure, safe haven has been rocked to its foundations with capital value Empty rates, brought in as a policy to ensure write downs of 44% - offsetting the 43% developers were not encouraged to assemble increase achieved between the end of 2003 property simply for profit, is clearly out and the mid 2007 peak, and the potential for of time. It is a significant drain on both rental growth seen by many as years away. landlords and occupiers and has sent many
04
companies into oblivion and reduced the present time. Property service companies
employment opportunities, particularly will survive to see growth but only after
within retail companies, all sacrificed further failures and rationalisation during this
in the name of an outdated and flawed year, as the cash and well of instructions run
Government strategy. dry. Those retailers who remain will benefit
from the reduced competition as a result
Where were the Credit Rating Authorities of those retailers who have not survived.
and the FSA when they were needed most? Secondary shopping centres and high
Why have they not received the same streets will struggle to promote a positive
criticisms as the banking fraternity of their trading position and will need to diversify.
failures? How could Lehman Brothers be Refinancing of retail property purchased at
posted with a positive rating and two day’s the height of the market in 2006/7 is now a
later find itself one of the largest corporate major headache. Vulture funds will convert
failures the world has seen? Why were to mezzanine finance based activities to take
Banks able to lend to house buyers, on self- advantage of these refinancing opportunities.
assessment applications, six or seven times Prime yields will remain low but the gap
salary, and sometimes even with a bonus with secondary property will remain wide.
loan to spend on a holiday and/or a car Development finance will remain limited
purchase, so as to assist with the pressures of for the next 24 months. Food superstore and
the house buying process? smaller supermarket outlets will continue
to perform well and may provide the only
Few of these questions will ever be viable catalyst for regeneration of many
adequately answered. My only hope is that failing retail locations. Retailers will adapt
the lessons from this recent and disastrous existing formats so as to occupy existing
past will ensure that we emerge stronger property on a more cost-effective basis. Some
and fitter in the future with prudent lending, retailers, particularly department stores,
coupled with achievable, objective and will have to rework their business models
rational decision making, based on good for new property to meet the more limited
quality advice and expertise. The one thing opportunities that landlords can offer in
the Government of any colour and the terms of incentives. Failure of retailers to
public must acknowledge is the importance adapt will limit their growth potential and
of the City of London and financial services could even threaten their future existence in
sector to the health and strength of the UK some cases. Rental levels will show growth
economy. The poor business and lending from current levels for prime property within
practices of the banks and unhealthy short- the next 12 months leading to investors
term bonus arrangements cannot be allowed considering reversionary value potential.
to return but the UK and the public need the Environmental issues will feature far more
City at its full strength. in both occupiers’ and investors’ decision
making processes, return estimates and cost
As to the future, it is relatively predictable. plans. Pension funds will continue investing
Public sector employment, which over the in prime real estate reflecting increasing
past three years has provided two thirds net deposits.
of all new jobs created, will now go into
reverse. Private sector employment will Central London retailing will remain buoyant
see growth and although it will be slow and while Sterling continues to be discounted
cautious it is only likely to absorb losses in against other currencies, although recent
the public sector. Because of quantitative rental growth will flatten. European visitors
easing, inflation is an inherent danger - it to the capital will be replaced by those from
will increase but will not replicate the out of the USA, China and India as the Euro begins
control figures of the early 80’s but is likely to to weaken and the Dollar strengthens. An
remain below 5% for the foreseeable future, increasing number of joint ventures will be
although this is only a six month window at put in place to manage and upgrade existing
Return to Contents 05
commercial property stock, rather than the the living rooms of most households, whether
grandiose new development schemes of the it be redundancy notices, graduates without
past 10 years. Cash will remain king both this jobs, school leavers without university places
year and next year. or who can no longer afford the costs of a
further three years in education, reducing
So, as will be seen, such predictions are not salaries, increasing income tax burdens,
so difficult and they have certainly been rising property rates and local taxes, National
easier than in previous years. What will Insurance increases and potentially higher
hold back the general UK economy and the VAT charges (try 20%).
property industry is likely to be found in
two areas. The first is a hung Parliament As the Government found out at the end of
following the election on May 6th because of January, when for the first time since 1993 it
the uncertainty and lack of decision making had to borrow money to fund an unexpected
that this will bring. Strong decisions, even shortfall in taxation revenues (obvious to
if they are bad decisions, will be better than many businessmen and women), the impact
a Parliament in suspension. The second in the “high street” is now because of the
is that last year, from the perspective of inertia that all markets suffer. However,
the consumer, it was a phoney recession. despite the inescapable truth that the future
The general public have watched and been is brighter, it will take another year at least
bemused as they read about the credit to realise this is a fact. Consequently this
crunch and sub-prime lending in the middle year will see the real recession impact on
of 2007, the collapse of Lehman Brothers in the consumer and the public at large, even
September 2008 and the falling profitability though the economy has in reality turned the
of the Banks coupled with bonus payments to corner, as demonstrated in the encouraging
bankers during the latter part of 2009 and the recovery of the share price of Lloyds TSB and
beginning of this year, none of which were RBS, which now almost matches the value
met with much understanding. The reality of the public purse in unplanned investment
of these events will now find their way into and rescue of the two banking giants.
06
Return to Contents 07
Out-of-Town Retail Agency
Market Snapshot
Tenants have negotiated hard. In some locations they have been
“bought” in by the landlord to secure occupation and rent on a
property that would otherwise remain vacant. Landlords have
carefully assessed demand and negotiated with a single potential
occupier accordingly. Competition for units has been much
reduced and in some sectors of the market there is effectively
only one acquisitive retailer.
Redevelopment of retail parks has at and many former MFI units have been
remained a desktop analysis. Acquisitive subdivided, or will be.
investors/developers have looked at several
opportunities where redundant buildings Some retailers have found it difficult to
can be brought back to life. However, the secure “quality” stores. Retailers are still
strength of tenant demand means that being choosy and without new build units
feasibility is difficult, so the existing owner some are finding that there is effectively a
will be forced to make the numbers work to reducing supply.
their best advantage.
As some retail park leases come to an end,
Void business rates have affected the the issue of dilapidations is becoming more
market. Landlords have deliberately prevalent and the number of regearing and
kept units vacant while administrators reversionary lease negotiations is increasing.
are technically “in possession”. Where
tenants may be interested in a temporary Green Shoots
occupation of former MFI, Land of Leather
or Allied Carpets units, the threat of void The sale of Pets at Home was a stunning
rates to the landlord stops negotiations success and the new owners KKR
progressing. Equally, where Galiform are increasing their expansion plans.
guaranteed MFI leases, Galiform are paying Hobbycraft will be sold soon. Investors’
rates on an unused property that they can’t valuations did not match John Hargreaves’
sublet and the landlord will not accept a required price, despite improving
surrender unless they can re-let, so the profitability and expansion, so he has
property remains vacant. Is this what refinanced instead. New Look’s IPO did not
the Government wanted? To summarise, proceed as planned in February but Advent
landlords are deliberately keeping some successfully bought DFS in April 2010.
properties unlet and reducing new business
opportunities to retailers. In the meantime, As the sector is dominated by institutional
no rates will be paid by the administrator. owners, tenants have found themselves
offered highly incentivised deals but this
Retailers continue to look at each property to may change as the market improves. As
make sure it is the right size and in the right tenants seek more stores, they are likely
location. Smaller sizes continue to be looked to accept reduced capital payments and
08
rent free periods from landlords. Where rare. Home furnishings has
landlords have found it difficult to raise
capital, or want to conserve it, rent free
regained some lustre but the
periods are more likely to be agreed. category killers, who have
survived the recession best,
While there have been a few new entrants, will emerge stronger to drive
for example, John Lewis at Home, DW
Sports and Best Buy, they will run into the market.
competition from the established retailers as
they all expand. Koodza (part of Decathlon)
Retailers Activity
have opened their first store and Boots’
The recession has brought some retailers
drive-through concept is expanding.
to their knees e.g. Land of Leather, Allied
Carpets (part of the business survives) and
The electrical sector remains one to watch
Au Naturale. Others have survived only by
as DSGi’s revised trading format and
Company Voluntary Arrangements, e.g. JJB
Megastores contrast with Comet’s smaller
Sports and Focus DIY, while at the same
10,000/15,000 sq ft footprint and high street
time others have grown and are looking to
stores, and there is also the threat of the Best
the future.
Buy/Carphone Warehouse combination.
DSGi’s combined store strategy with PC
Value retailers have chosen their moment to
World sharing a unit with Currys will create
expand and take advantage of the property
further demand and asset management
market, e.g. B&M and Home Bargains.
opportunities. Best Buy are keeping
Poundstretcher are back in the market
their retail offer and business model to
and there has been a welcome return
themselves but their delay in the first store
from Matalan, who opened three stores in
opening at Thurrock at the end of April this
2009, after publicly stating that rents were
year, in competition with the new Currys
unsustainable in recent years. Six more are
Megastore and existing Comet, means a true
planned in 2010.
comparison cannot yet be made.
John Lewis at Home opened their first store
The market expects to see smaller format
in Poole during October to great acclaim
DIY stores over the next few years, for
and have secured two more. They will not
example Focus’ new 15,000 sq ft store that
compete with their own department stores
will open in June 2010 in Congleton.
but clearly the business sees opportunities
in these “in-fill” areas and such acquisitions
Forecast will be more important as new town centre
stores are delayed e.g. Croydon, Purley Way.
ERV’s and book values will
have a major effect on asset Successful businesses that secured new
management strategies. financial resources in 2008 have expanded,
e.g. Dreams and Dunelm. A new
Headline rentals remain distribution warehouse has allowed Dreams
important but tenants will to open more stores in the North. Dunelm
continue to want capital have been prepared to negotiate hard and
not do deals if the terms have not been
contributions and long rent attractive enough. That has not stopped
free periods. Where there them from opening eight stores in 2009 but
is strong demand, values there is now clear evidence that competing
may get back to where they retailers for similar sized stores will reduce
opportunities in some towns, particularily as
were in 2008 but this will be ASDA Living are on the acquistion trail.Return to Contents 09
If The Range and Hobbycraft were reported What the market has not seen yet is take up
as “two of the UK’s best kept secrets” then by the DIY retailers. Four fascias of varying
the writer was not in the retail warehouse range, corporate make up and a mature
market. They have been active players marketplace, may mean opportunities are
and a new format or corporate activity will limited, but they remain a major part of
maintain that position. Pets at Home have the existing stock and must be prepared as
been another success and thirty stores a the UK comes out of recession. Kingfisher
year means that they are usually top of the results reported a doubling of profits to
requirements list. 31 January and they are investing in the
new “Trade Point” while Travis Perkins are
Gradually, the better located “old” units are trialling the Wickes Kitchens & Bathrooms
being filled and the market is now looking in two smaller stores.
for new development opportunities and,
where it is economic, asset management The “high street” retailers show no sign of
to create the right space. This demand reduced expansion into 2010. TK Maxx want
may come from the electrical sector where more stores for the fashion and Home Sense
the Best Buy fascia will feature on at least fascia. The Borders units are gradually
five retail parks by the end of the year. It being taken up whether it is by a HMV/
will include their rivals Currys/PC World Waterstones combination or the relatively
as they seek to expand and improve their new entrant H&M. Next and Next Home
portfolio, building on the rebranding are expanding and fashion parks provide
success of 2009 - 60 locations for combined the right retail environment for New Look,
stores have been identified. Arcadia, River Island, JD Sports/Bank
and Peacocks.
2009 & 2010 Unfold
QUARTER 1 - 09 QUARTER 2 - 09 QUARTER 3 - 09 QUARTER 4 - 09
• Land of Leather fails. • JJB CVA sails through. • Focus survives via CVA. • John Lewis open first “at
• Baugur files for bankruptcy • Dave Whelan back in the • Allied floored but newco Home” store.
protection. market with DW Sports & starts again. • Boots expand drive through
• Stylo Barratt CVA falls on Leisure. • DFS looking good at 40. pharmacy.
stony ground. • DIY rallies, including sales • Furniture/furnishings • Blacks CVA.
• Best Buy delay openings to of kitchens. recovery. • Hilco buys Habitat.
Spring 2010. • Decathlon considers small • Pets at Home active • Borders administration.
• B&Q turns 40. stores for Koodza expansion and opens • Hobbycraft prepares for sale
• Expansion of value retailers. • Birthdays failure and 30,000 sq ft store. in Q2.
purchase by parent, Clintons • Carpetright is not taken • Dunelm maintains
private and is trading well expansion plans.
“Christmas trading worst in
14 years.” “Mixed fortunes but
recovery starts”. “Recession ending ?”. “Early Christmas sales as
“Retailers best kept secrets
“Landlord and tenant “Good retailers will emerge VAT goes up on 1/1/10.”
include The Range and
relationship changed” stronger”. “Supermarkets still trading
Hobbycraft.”
well”
QUARTER 1 - 10 QUARTER 2 - 10 QUARTER 3 - 10 QUARTER 4 - 10
• Positive but cautious outlook
to the retail market.
• Pets at Home bought by
KKR.
• Matalan is not sold and New
Look’s IPO is pulled.
• January sales poor due to
the snow.
• DSG have a good Christmas
• Go Outdoors raise money for
expansion
• Au Naturale fail.
“Officially out of recession.”
“Bumpy Road ahead”Return to Contents 11
Occupational Marketplace
Short Term Flexibilty?
Current Issues in the Occupational Marketplace
Landlords, e.g. Prudential, are more receptive to monthly rents
by agreement on existing leases (occasionally, for a period of
time) and on new leases, CVAs, re-gearing, etc. It is no longer a
big deal. Of more interest is the length of term and assessment
of rent at rent review. Land Securities are pioneering their
Clearlet contract.
Short term lets and break improves. Alternatively, • During this period Open
clauses after five years or the landlord will agree to a Market Value (OMV) is
less, together with rent mutual break so that they difficult to establish/agree
reviews fixed, geared or can re-let at the right time on, or indeed write into
capped on a percentage for them. formal valuations without
basis, other than Open caveats. Does one
Market Value, show a • Can a retailer plan their temporary letting affect
disconnect from the business on such short the rental value throughout
traditional retail property term occupation, or does a retail centre in the same
investment model. Letting re-gearing a lease prior to way as one letting set a
agents and their clients are expiry, for a term of ten or new rental tone in 2007?
working closely with the fifteen years, show that for
fund managers and their the best locations tenants • Where a tenant wants
valuers. want security of an incentive to occupy but
occupation? equally the right to break
Several issues and questions the lease after a short
have arisen from such • A retailer can “test” the period of time, then the
negotiations: location before making landlord will say no,
a decision to occupy on or argue that part of the
Short Term Lettings a longer term, e.g. Sports incentive is repaid if the
Direct and Steinhoff. contract is broken.
• The landlord accepts the
current uncertainties • Such flexible leasing • Should any incentive be
but has to find a tenant negates the 1954 Act only a capital payment or an
in the short term and lets if it is “contracted out”. Not extended rent free period?
accordingly. In some cases all tenants want this but
this will mean a “rates and can they have it both Rent Review
service charge” only deal. ways? Agreements
• The landlord accepts • A “pop-up” shop targets a • Fixed rent reviews to an
the current uncertainties particular time of year or agreed percentage, or
and decides to keep the event. in line with a nationally
unit vacant until demand recognised index e.g.12
RPI, means that tenants for OMV at the end of ten problems in transparency
can plan their business for years i.e. without a cap or of individual store
the future, without the lease ends. accounts.
the threat of large rental
increases “in the market” • As tenant tension comes Other Issues in the
undermining their own back into the market this Marketplace
business model. is likely to be one of the
first points renegotiated, The property market has
• Landlords will value the either to an increased agreed to several Company
income on their percentage or that the Voluntary Arrangements
assessment of such tenant has a break clause (CVAs) since the first one,
indices and whether OMV after the rent review. proposed by Stylo Barratt
will be in line with in Spring 2009, which was
it. If they think it will Turnover Based Rents rejected for many reasons.
“underperform” the Subsequently JJB Sports
market place for such an To balance the arguments and Focus DIY entered into
investment, they will sell above, some negotiations are meaningful discussions with
and invest their money progressing on a turnover their landlords, confirming
elsewhere. The purchaser related basis but there are that anything other than
may be happy to have a issues there too: a CVA would mean the
fixed or capped increase company would go into
but will value accordingly. • Turnover only is disliked administration (with all
by landlords. They need a which that entails). They
• A “low” initial rent makes set out a credible business
base rent to value but what
it hard for a landlord is OMV? Is it the base plan for the future and kept
to accept a capped rental rent because that is existing leases largely in
increase and negotiations what the tenant will place, while agreeing exactly
revert to a short term agree to pay (and no one what happened to those
lease. else will pay it) or are leases where the company
book values, underpinned no longer found it profitable
• There is little evidence of by valuers, being to trade from the so called
upward and downward maintained at a notional “dark stores”.
rent reviews but lots of OMV on the assumption
evidence of retailers that turnover is at a certain The retailers’ management
wanting to pay a level? Are valuers the best and their advisors worked
sustainable rental level for assessors of turnover? hard to agree a survival
their business. The market strategy and landlords made
will avoid those retailers • It allows deals to be tough decisions. Tenant
who take a large capital progressed in a difficult restructuring has become
payment as an incentive market. Both sides are a “market place” of its
to pay an “over the odds uncertain but the rent will own. Pre-packs have not
rent”. Such a company is increase if the tenant gone away but the market
more likely to fail when trades well. disapproved of them and
that capital no longer more CVAs are likely as
supports the business. • It allows for rent to fall tenants need to restructure
from year to year if trading to survive, although the
• If there is a market norm decreases, so it answers “rules” continue to evolve.
in the retail market sector, some of the questions It is not an “easy option” for
the last few months have about upward and the tenant or the landlord
seen more deals agreed downward only rent and can only be done when
with upward only rent reviews. the company is about to fail.
reviews at the end of five
years to OMV but capped • Administratively, for both
at 2.5% per annum. The landlord and tenant, it is
landlord will then argue a hassle and there can beReturn to Contents 13
Issues arising out of CVAs at a reduced level until such some tenants to pay a
are as follows:- time as the park is fully let. higher rental on the date of
Does such a deal lower the exchange. Landlords have
• Short term changes to rental tone and OMV during seen demand improve into
existing contracts may be that period? 2010 but on the whole the
agreed, e.g. monthly rents market is still favourable
for a year or two. Landlords (and tenants) to the tenant. What has
are struggling to assess changed for the better is the
• The company is not covenant strength. Report landlord and tenant “client”
destined to survive. Some and Accounts from a year relationship. If retailing
landlords will not wave ago may not give a realistic has been tough in the
them through, or are and current view based on recession then so has being
avoiding tenants who have changes in occupational a Landlord.
gone through a CVA until costs and turnover.
their trading results prove Management accounts
are being requested but While the market
that they are making
profits. Landlords will a landlord cannot tell if a will continue
look carefully at the recent company sale will to swing like a
background and will not ensure the viability of a
support every one. business e.g. Ethel Austin. pendulum, the
Equally, watching signs recessionary
such as credit insurance
• Other retailers feel
cover being withdrawn and
conditions have
aggrieved. They see other
retailers in a competitive company sales to corporate highlighted
sector to theirs being recovery companies e.g. some property
Hilco, shows that others
“saved” and in particular
involved in that tenant’s fundamentals that
ridding themselves of
underperforming property. business have concerns. could change. This
Head tenants have suffered particularly refers
• Every retailer has their loss when sub-tenants fail
and retailers have lost out on to the Landlord
bottom five stores which
they would like to re- new store openings where and Tenant Act
gear or surrender, but have developers have failed. 1954 and we have
to do that by negotiation
rather than under the New tenants will said before that it
threat of a CVA. They understandably not want is ripe for reform.
argue, understandably, to give any guarantees,
that the market shifts but there will always be Imminent lease expiries
against them and that they a balance between the create opportunities. B&Q
are penalised for being a risks of keeping a shop and Halfords are actively
successful tenant. vacant against trying to managing their estate by
help a tenant survive or engaging with landlords
If agents agree the best thrive. Lack of demand will well in advance. New and
terms that they can for their influence the risk taken. reversionary leases are being
respective clients, that will considered and it starts to
leave the valuers to establish Improving tenant demand focus the landlord’s mind on
Open Market Value (OMV). will dictate when changes the future of their holding
We refer to this above and are made to the incentivised in terms of occupancy,
some of the issues arising occupational terms that rent, lease terms, planning,
from the deals struck on landlords have been offering. competition and potential
terms very different to what Terms offered in May 2009 redevelopment. The retail
was the norm until two years have been withdrawn at park boom of the late 1980’s
ago. Lack of tenant demand the end of the year and with 25 year leases means
has meant that rents an alternative tenant or that strategies for 2013 and
collected on some units are better terms has forced 2014 are already drafted.Out-of-Town Investment Light... After The Darkness John Shuttleworth on the remarkable turnaround in the retail warehouse investment market.
Return to Contents 15
The events of the last 12-18 months are well documented and,
rather than repeat the sequence of events that unfolded, it is a fair
summary to say that we have been in a dark place. But where are
we now?
During the course of the last six months, i.e. up assets in Quarters 1, 2 and 3 2009 from
during Q4 2009 and Q1 2010, there has been those forced to sell and have now “flipped”
considerable activity in the retail warehouse these assets during Q4 2009 and Q1 2010,
investment market. This has been driven by in some cases for staggering profits to those
cash purchasers in the form of both private same forced sellers who are now back in the
investors and the pension funds. A high market and queuing up to buy again.
level of demand, coupled with the limited
availability of prime stock, has forced yields A striking example of this was
downwards and some seemingly very high Chancerygate’s purchase of The Flare
prices have been achieved. Portfolio from Invista in May 2009 for
£37.5m, a net initial yield of around 9.2%,
This high level of demand has been driven by which they subsequently sold in December
a number of factors. 2009 to a major UK fund at a price of £52.5m,
reflecting a net initial yield of around 6.6% -
• Negligible returns on cash. a 40% profit on the turn within eight months.
• Lower returns on gilts and equities. There are other examples of this nature
including the London & Stamford purchase
• A weak pound and the exchange rate of the Racecourse Retail Park in Aintree from
arbitrage. Land Securities in June 2009 for £60.92m, a
net initial yield of about 8.5% and which is
• High inflows of money to the pension funds now on the market for around £100m, which
– at the rate of £3m per day in one case. would reflect a net initial yield of about 5%.
It will be interesting to see if the current
A number of investors have done extremely market will support pricing at this level.
well as a result of this. They bravely bought
Out-of-Town Retail % Yields
Dec April Sept Oct Feb Apr
2008 2009 2009 2009 2010 2010
Shopping Parks 6.75 - 7.00 6.75 - 7.00 6.50 - 7.00 6.00 6.00 6.00
Open A1
7.00 - 7.50 7.00 - 7.50 7.00 - 7.25 5.75 5.50 - 5.75 5.00 - 5.50
Retail Parks
Bulky Goods
8.00 - 9.00 9.00 8.00 - 9.00 6.50 - 7.00 5.75 - 6.25 5.75 - 6.25
Retail Parks
Solus Stores 8.50+ 8.75 8.50 - 9.00 7.00+ 6.00 - 7.00 6.00 - 7.0016
In a general context, a year ago prime bulky goods retail parks where there is a
retail parks were changing hands at net bit more yield, but tenant line up is crucial
initial yields of between 8-9% and now, with covenant strengths being very carefully
one year on, a 5.3% net initial yield is the scrutinised. Such has been the clamour for
lowest yield paid in this cycle thus far, this this asset class that investments with voids
being Blackrock’s ‘off market’ acquisition are changing hands but at prices that reflect
of the Flowerdown Retail Park in Weston- risk and with three years plus guarantees on
super-Mare from Cranford Developments rents, rates and service charge. The current
for £28.5m and the PRUPIM purchase of occupational market dictates that incentives
Stanley Green Retail Park in Manchester at these levels will be required in any event
from Henderson Global Investors (Herald) and so although on the face of it this is
for £47m. Yields have still not fallen to the generous, there remains considerable risk.
previous levels seen at the height of the
market in 2006/2007 but these prices still Demand remains strong for stand-alone
look expensive when considered in the retail warehouse units – often given the
context of the occupational market where more manageable lot sizes of up to £10m –
demand is limited, vacancy rates are high particularly where the property is occupied
and rental levels have fallen, with little to by one of the stronger covenants on a
suggest that this position will change for long lease of 15 years plus. A number of
some time to come. investments let to B&Q have now achieved
close to 6% NIY and pricing is currently
Not unexpectedly the top prices are being below this in some instances.
paid for prime/dominant retail parks with an
open A1 planning permission, a High Street The one sector that has not truly been
tenant line up, or the prospect of achieving tested in the current market are the major
this and lot sizes of up to £30m. This shopping parks, once most sought after
reflects the ability to secure ‘more attractive’ but now viewed rather differently for two
retailers, stronger covenants, to have greater principal reasons. Firstly the lot size is
flexibility and increased prospects for rental prohibitive to all but a few. Any purchase
growth. There remains demand for prime would require significant levels of debt andReturn to Contents 17
debt remains hard to come by. Secondly, • Overseas demand will fall as interest rates
the rents on schemes of this nature are rise and the pound strengthens.
high at say £45.00 per sq ft plus and it is
difficult to foresee significant rental growth • The forthcoming general election – what
from these levels for the foreseeable future. cost a hung parliament?
Despite their general success, shopping
parks are not immune to retail failures and • Increased taxation - Income Tax, VAT,
loss of rent at these levels is significant, as is Capital Gains Tax.
the likely incentive package required by the
next occupier - assuming one can be found. • The repayment of an unprecedented level
of public debt.
In recent weeks an air of caution seems to
have returned. The active investors, perhaps • Public sector cuts – likely to be 10%
having bought one or two investments, are minimum across the board.
now taking a step backwards, believing
that the prices being paid are too keen For the time being the investment market
and keeping one eye on what may lie just is strong. There is good demand and
around the corner with many commentators improving prices being paid despite the
predicting a double dip recession. weak fundamentals in terms of high vacancy
rates and rental growth prospects. It is
While this is not something we would difficult to see how this can continue given
promote as inevitable, the warning signs are what is to come and the signs are there that
there for all to see. the market is a little too hot at the moment,
with one or two funds pulling back from
• The banks have been extremely chasing acquisitions. That’s the prognosis in
disciplined thus far with regard to their the short term but let’s not forget property
property loan books, but the pressure should be seen as a long term investment,
must be increasing to dispose of an outlook that unfortunately appears to
property assets. have been lost in recent years.In-Town Issues...
Mark Paynter gives his
thoughts on the state of the
market and the prospects for
future development schemes
in town centres.
Q Times are still uncertain, so will there be
further casualties on the High Street?
A In terms of the supply/demand equation,
retail failure still lurks just under the surface
with Borders failing just before Christmas
and others such as BB’s Coffee, Threshers,
Envy, Adams, Blacks, Coffee Republic, Ethel
Austin, Suits You and Bay Trading all having
failed or been subject to CVAs.
The major accountants have reported the
likelihood of continuing failure, although as
this report goes to press there have been no
nasty surprises at the March quarter day.
According to the Local Data Company the
rate of retail vacancy remains high but the
rate of growth is now slowing. The in-town
centre health check in February suggested
that we are still seeing one store opening for
every 1.3 store closures. Vacancy rates also
vary widely from a reported 6% in Corby to
23.9% in Wolverhampton. The Local Data
Company also suggest that the areas of Kent,
Midlands and the North East are on average
seeing a higher level of vacancy, whilst
London and its suburbs have held up well.Return to Contents 19
Q What has been the effect of CVA’s in the Q How is this now playing out in terms of
High Street? tenant demand?
A The CVA process has continued to put A Outside London, increasing vacancies
pressure on rents although this is more and overhang of new stock have seen
likely to be the case where the unit’s many landlords having to grant substantial
trading performance was in the bottom two incentive packages in order to buy in
quartiles. Inevitably this tends to be in demand. A range of tenant deals are still
the weaker centres, although it can also be available in many centres – whether they
larger centres where rents were driven to serve small or large catchments, and this has
unsustainable pre-crash levels. created ‘tenant tension’ in the better areas.
Although CVAs have been contentious, On the basis that the future development
they have probably reduced the amount of ‘pipeline’ has all but dried up and seems
vacant stock compared to the last recession unlikely to start flowing again for some time
and potentially the supply/demand balance (see below), the stronger retailers might
could return sooner than last time around. need to look at their deal store before the
better stock runs out. For example Primark
have tied up a transaction to take 10 Bhs
Q So the outlook continues to look bleak? stores so remaining ahead of the game.
A Not for everyone. Some retailers are With vacancy rates in many town centres
continuing to do well and are making now reaching 15%, temporary deals for
strong profits – such as John Lewis, Iceland ‘pop up’ shops remain an important route
and Primark. for landlords to reduce void rates and
service charge liabilities. It also provides
Some retailers are looking to the future opportunities for new entrants to the
and are seeking to exploit opportunities to market such as Oxygen and Hype to test
expand. They are also concerned about the the market without major risk and expense.
development pipeline when the economy Hopefully some of these operators will
improves. In many locations outside London become mainstream retailers with wide
there are just not enough of them to drive representation in the coming years.
strong demand for rental growth.
The major fashion operators continue to
I would suggest that even those retailers seek big stores in excess of 7,500 sq ft,
with a secure footing are likely to remain so providing a broader offer and a bigger
cautious – at least until the General Election market share through economies of scale.
is past when they might have a clearer
view of VAT, future interest rates, and However there is no doubt that the focus
prospect for future employment - of demand has shifted away from smaller
particularly in the public sector. There centres towards the major ones serving
seems little doubt that the prospects for an bigger catchments. These locations offer
increasing tax burden on the consumer is the best prospect of higher turnovers but
also likely to hold back any bullish forecasts without the high rental risks that may have
for rapid improvement in consumer been attached previously. Smaller centres
expenditure, and therefore increased are tending to lose out in major fashion
demand in the retail property market. representation, although there is still
demand for space in sectors such as discount
operators and foodstores.20
Demand for space in these smaller the market must surely translate into low
centres is also being squeezed as multiple average residual land values if development
retailers now promote their online is to stand a chance of being viable at an
offers, so reducing the justification for early date.
nationwide representation outside of the
top 100 centres. It is interesting to see Those developers that were tied in to pre-
the recent appointment at John Lewis of recession values, along with high section 106
a new commercial director with overall costs and large residential elements to their
responsibility for multi-channel retailing schemes, have started to fall by the wayside.
including property and development. We have recently seen Hammerson step in
to take up the development management
I recently used one major retailer’s internet role on the former Thornfield Ventures
ordering system to secure a very competitive scheme in Bury. Also the recent sale of a
price point, picking the ordered goods up a number of former Modus schemes to the
few days later in their High Street branch. Scarborough Development Group while
It provides the consumer with a massive the Trinity Walk scheme in Wakefield
stock catalogue, far bigger than is capable of was bought out of administration by a
being stocked in most high street units, but consortium of AREA Sovereign Land and
without any postage costs and a convenient Shepherd Construction.
option for collecting or taking back goods
if unsuitable. It is possible that some schemes might
still work, but the question is at what cost?
The main department and variety anchor Some readers may recall The Galleria
stores are already struggling to add development on the outskirts of Hatfield
substantial floor space; this has already in the early 1990s - some £160million of
led John Lewis to develop its ‘At Home’ construction cost was eventually bought
concept in order to advance the brand in the out following receivership at a figure of
short term. £10.5million. This may happen again unless
the banks actually retain their current
Demand for space in Central London and in position for up to seven years as some
the quality London suburbs remains strong are predicting.
with tourist spend in particular driving
sales. We have seen ‘best bids’ being made Openings this last year include Centros’
on premises like the former Borders store Bury St Edmunds scheme of 265,000 sq ft
in Islington. and Land Securities’ St Davids Centre in
Cardiff of 970,000 sq ft anchored by John
Lewis. Also the Eldon Square extension of
Q Given the lack of finance and market 400,000 sq ft and the new Southgate scheme
turbulence, what do you think are in Bath of 470,000 sq ft.
the prospects for major town centre
development in the short term? We have recently seen the major proposals
at Park Place, Croydon firstly “chopped in
A I am in no doubt that the traditional half” and then abandoned completely as the
trader developer model from where we reality of its lack of viability has eventually
stand today looks challenging. Particularly become clear to the local authority
as banking finance generally only comes promoter. The possible phasing of major
through to allow a start on site once 60%- schemes may be the way forward in some
65% of the income is pre-let off plan, based instances. Of course it is notoriously difficult
on sensible rents and incentives. to achieve in practice - particularly where
residential is included.
Any one of those requirements looks
difficult to achieve and such restrictions inReturn to Contents 21
A radical rethink is now required, by both possession and re-letting when the market
developers and local authorities, if schemes is moving forward strongly in two or three
are to come forward in a timely fashion once years time.
the overhang of vacant space recedes. Based
on the timeline of the early 90’s recession it The bigger, stronger retailers are looking to
could well be eight or more years before the lock down value over a longer term of up
majority of town centre developments are to 10 years. Although a landlord might see
built and open. potential upside based on turnover, with base
rents reviewable to 80% of open market value
In the current market the most likely form there are no guarantees.
of development will either be led by a major
supermarket or involve extensions to No wonder landlords are also pushing for
existing centres of between 50,000 and lettings outside of the Landlord & Tenant Act
100,000 sq ft which provide no more than 1954, so that these concessionary terms are
10-20 large spaced units where demand not set for a much longer term on renewal.
remains strongest.
For those longer term projects this is the right Q Will we see rents increase this year?
time to set returns and land values to ride the
market back up. A We are seeing improving demand in some
areas which will have implications for future
rental growth, although the fundamentals
Q Where does all this leave values? of each centre will have to be researched
carefully. King Sturge are predicting that
A It is difficult to see an established tone average retail rents will fall by 3.1% in 2010,
based on recent transactions in most high by a further 1.3% in 2011, with rents only
streets and shopping centres outside of starting to move forward again in 2012.
London. Demand remains inconsistent
and each deal will be judged on its merits, PWC have reported that some 18 to 22%
whether it be the landlord’s ability to finance of the space currently vacant will never
a continuing void or the retailer’s return on be re-occupied. This provides a base for
capital judged against the attractive deals on redevelopment or reconfiguration, but until
offer elsewhere. the true loss of value of this type of space is
reflected in book values we will never get to
A landlord’s desire to secure a deal might the start line.
also be driven by whether a particular
fashion retailer is going to lift the tenant mix We question whether some space really has
alongside and generate higher returns, rather a value as it is all very well making a 12-24
than a more advantageous deal with a weaker month void allowance but this still assumes
retailer providing limited on-going benefits. that tenant demand will return to secure
occupation and drive rents in the future.
The temporary let and pop-up market where We would agree with PWC that some of the
we are also seeing leases for two and three existing vacant space will never be capable
years is really a shorter term mitigation of of securing tenants and therefore, until
void costs by landlords. Further, tenants values are written down to reflect the true
are now making it clear that 5 year terms picture, we hold back redevelopment or
in prime locations are too short, especially the reconfiguring of space which is capable
when the landlord insists that security of being re-let or converted to some
of tenure provisions are excluded. Fixed alternative use.
uplifts and turnover top ups might provide a
landlord with some potential upside, but they
really have their sights on securing vacantIn-Town Investment Where do we go from here? Keith Nelson on strong demand for prime stock and weak fundamentals in the in-town investment market.
Return to Contents 23
Following the unprecedented bounce back in investment
activity for prime well-secured property in October last year,
the question on everybody’s lips is whether the bubble will
burst and the predictions of a double-dip will prove correct.
From a cursory glance the including: Silverburn, one has to ask whether the
investment market appears Glasgow for £297 million market has already become
to be out of step with the to Hammerson and Canada overheated?
occupational market. For Pension Plan; The Darwin,
those with cash and an Pride Hill and Riverside More worryingly for any
ability to work off loan Centres in Shrewsbury market is uncertainty,
to value ratios of 60% of for some £61 million at which looks set to continue
current market value, 2009 6% initial yield; La Salle for some time. Proposed
presented investors with Investment Management public sector cuts and
opportunities to secure paid £100 million for The taxation increases, coupled
retail property at sensible Mall, Bexleyheath; The with the spectre of a hung
prices for the first time in Crown Estate purchased a parliament as a real option
many years. Those shrewd 50% share of Princesshay following the forthcoming
investors, who risked early in Exeter for £100 million. general election, does
entry into the market before Further shopping centre not create confidence.
autumn last year when sales are currently being Against this background we
yields went into freefall, progressed and more stock would argue that property
have already been able to can be expected to come investment at present is
realise large returns on onto the market in the near high risk.
their investments with future. However we have
inward yield shifts of up already seen a lessening Of real concern is that
to 200 basis points. The in demand for stand-alone the fundamentals are still
hardening of yields also retail investments as many not in place – the retail
produced some very quick investors have snapped up sector continues to struggle
re-sales, rejuvenating a perceived bargains early in with reduced consumer
market which had seen the cycle. spending and rental growth
even prime properties is consequently very
failing to sell and a lack of A year ago prime shopping unlikely. In secondary
stock being placed for sale. centre yields were around locations throughout the
7% and one year on they UK we are seeing a major
The weight of money has are circa 6%. Prime shops re-pricing of rents and
been marked by a return of were 6.25% and today assets. As investors become
net deposits and in-flows have reached 4.75%. Yields more selective regional
of funds to the institutions, are still higher than at variations are playing a
coupled with overseas the peak of the market in role in investor decisions,
investors seeing the UK as 2006/2007. There is still with the traditional strength
an established sophisticated some distance from the of London and the south-
market, providing relatively heady heights but the gap east and other major UK
cheap opportunities. As a has narrowed considerably. conurbations returning to
result many single retail It can therefore be argued the fore. Rental growth has
properties and retail that these new levels look continued in central London
parades have sold and expensive when considered as the fall in value of Sterling
a number of shopping in the context of the current has had a positive impact on
centre sales also completed occupational market and the influx of tourists withbargain basement shopping A number of owners of capital for undertaking asset
in mind. Vacancy rates in investments in this category management opportunities.
the provinces may well be have therefore taken Although this does present
above 15% as an average, advantage of this bubble to an opportunity for asset
but footfall and turnover offload stock, which may management strategies,
in Central London is up by look more vulnerable in a both the speculator and
some 5% and empty shops few years time even if the investor must carefully
are a rarity. economy has recovered. consider the changes in
On the other hand, some retailer requirements and
Many investors have been investors have taken a location factors. Positive
seeking prime property view on lease length as approaches will require
across most sectors, let to they perceive that retailers changes of planning to
strong covenants with at located in prime locations enable redevelopment
least ten years unexpired. will want to maintain angles to be considered.
Exposure to risk has their representation and This has been seen as an
increased, however, as duly renew their leases. opportunity in some failed
retailers have taken the However, in today’s shopping centres where
opportunity to negotiate unpredictable market rent- alternative uses, such as
more favourable lease free periods and other food stores and hotels
terms, including break incentives have to be could result, coupled with a
clauses and shorter leases considered in any appraisal, need to install community
thus exposing investors especially as funds to fit out and social facilities which
to more uncertainty. are difficult to source both draws the catchment
Furthermore, the focus by the landlord wanting to back to the centre such as
of the major institutions give an extended incentive health and medical centres,
on the top 100 centres is and by tenants who need to educational facilities and
increasing the risk afforded expand. community project uses.
to centres that fall outside The difficulty is assessing
of this classification, with The secondary market investor sentiment to
the spectre of rental falls has continued to struggle non-core activities, which
associated as much with with increasing vacancy enhance the location but
the redressing of a centre’s rates and we do not see provide income streams
position within the retailing any improvement in this which fall outside investor
hierarchy as with the sector for the foreseeable requirements. The recently-
impact of a recessionary future. Many secondary published BCSC report on
economy and weak shopping centre owners are shopping centres indentified
consumer expenditure. at risk of defaulting on their that out of 820 shopping
loans and there is a lack of centres in the UK, someReturn to Contents 25
155 were at financial risk forward. The banks have The availability of debt
by defaulting on loans been shrewd and in our from the banks is reported
with a total debt provision opinion will continue to be to be increasing. However,
of £10billion – almost a so, only releasing product with stringent terms and
third of the total estimated on to the market when unattractive rates imposed
commercial property bad they can secure adequate only the most stable
debt provision of £30billion returns. We have already investors will be able to
as at the first half of 2009. seen banks utilise asset take advantage of what may
With lending to UK real management companies be on offer. Long gone are
estate at a record level of such as Hammerson, the days of free and easy
£240 billion (£200 billion Delancey and Centros finance, yet prime property
in all currencies), it is to provide the necessary continues to be strongly
going to take the economy expertise in managing out priced after a brief fall into
many years for the debt their over-exposure. Those the ether and many are
pile to find a sensible cash rich investors are keen now realising that the true
benchmark level. that the banks will release opportunity to buy cheap
more stock onto the market has now passed. With the
For the time being, demand during the next few months. occupational market still
for good quality investment under pressure and the
property stock continues Underlying this newfound ending of government
to outstrip supply, even status for prime property fiscal stimuli and increased
though many banks are is a considerable weight of taxation expected, the latter
not renewing loans made money waiting to be placed. half of 2010 may be more
just three years ago at This may grow as UK challenging. We have seen
the height of the boom. PLC remains an attractive a more cautious approach
Commercial lenders who proposition for overseas from investors in the last
became heavily exposed to investors, with the down few weeks indicating that
property over the past five side on currency arbitrage some are concerned that
or six years are now starting now regarded as limited – the market is already
to reduce their exposure as sterling has returned to a overheated, but demand
to commercial property reasonable level especially for those properties
as other buyers and new when compared to the offering the traditional
lenders, together with Euro, which many regard as fundamentals remains and
mezzanine financiers come artificially high. will remain strong.
Shop Property % Yields
Dec April Sept Oct Feb Apr
2008 2009 2009 2009 2010 2010
Prime High
6.00 - 6.50 5.25 - 6.00 5.50 5.00 5.00 4.75
Street
Secondary
8.00+ 8.00+ 10+ 10+ 10+ 9.00+
High Street
Prime Shopping
6.50 - 7.50 7.00 7.00 6.00 6.00 6.00
Centres
Secondary
9.00+ 9.00+ 7.50+ 9.00+ 9.00+ 9.00+
High StreetProfessional The Armageddon Argument Ian Campbell considers some current issues in the field of rent reviews and lease renewals.
Return to Contents 27
The post-Lehman era has seen increasing difficulties for the
professional practitioner. Tenants have continued to put forward
the Armageddon argument in respect of review dates after
13 September 2008 and there is some evidence from recent
Arbitration Awards of substantial discounts being applied relative
to pre-Lehman transaction dates. However we feel that the date
of 13 September 2008 is too simple a cut-off point to apply and
that where the fundamental qualities of specification and location
still apply, rental increases may still be probable.
Indeed Chase & Partners is size of units. We have surplus stores arising from
have recently achieved an witnessed a reduction in B&Q’s concentration on
uplift on the Homebase unit demand for large stores at their Warehouse and Mini
at the O2 Centre, Hampstead a time when there is an Warehouse format and the
where the review date of 29 increasing supply of such resultant general rightsizing.
September 2008 post dated units upon the market.
the Lehman collapse by While the fallout from the We forecast that it will
only two weeks, arguably a Courts and Allders collapses continue to prove difficult
period when the market was in 2004/2005 has largely to establish rental increases
in its most heightened state seen that vacant space on large stores where similar
of flux. taken up, more large units stores remain vacant in a
have come to the market town. Once this supply of
One of the main issues following the collapses of surplus stores is reduced
that continues to dominate MFI and Woolworths (Big through reletting, breakups
the out-of-town market W), the Focus CVA and the or redevelopment, then theYou can also read
