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Viewpoint - 10/09/2014

Prime shopping centres drive demand but what are the prospects for secondary schemes?

The recent strength of investor demand into shopping centres has been focused on prime schemes where rents are rising, vacancy rates are low, and food and beverage (F&B) and leisure is an important component. However, in an improving economy, is there an opportunity for investors to move up the risk curve by investing in secondary centres with strategic asset management?

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Investment volumes are returning to pre-recession levels

Strong investor appetite for shopping centres in the first half of this year saw investments reach £2.96bn. This puts 2014 on track to exceed volumes since the onset of the recession. This hefty demand from investors, however, is not matched by rental performance: the second quarter of 2014 saw a decline in rental growth of 0.3% year-on-year, the sixth consecutive year of negative growth. Compared to the all property average which saw an increase of 2.0% year-on-year, shopping centres are underperforming. At 5.60%, the shopping centre transactional yield in Q2 has fallen below the all property average (6.06%) for the first time since 2010. It is therefore getting more expensive for investors to access the shopping centre market, so why is investment demand outpacing rental growth? 

Investors are focused on prime schemes…

The weight of money investors are channeling into the sub-sector has targeted prime shopping centres where rental growth is positive.  A large proportion of investments in the first half of the year were into modern, large, regional shopping centres: in fact almost half were derived from just three deals – Bluewater, Merry Hill and Westfield Derby, totalling £1.5bn. The acquisitions of the latter two are part of Intu’s strategy to focus on the UK's largest and most successful shopping destinations. This is the approach adopted by many of the top UK retail property investors including Hammerson and Land Securities. Over 70% of the investment volume in the first half of this year was made up of single deals over £100m – the highest proportion this century.

…where retailer rationalization is driving rental growth

IPD figures for Q2 show the newest, largest and/or out-of-town shopping centres have experienced positive rental growth. Hammerson’s UK portfolio of prime shopping centres saw like-for-like net rental income grow 2% in the first half of the year compared to the same period in 2013. In contrast, older, smaller and/or in-town shopping centres have seen negative growth.

Prime schemes are benefiting from a rationalization of retailer store portfolios that is focussed on operating fewer stores in the best locations, helping to drive rental growth and minimizing voids. The top 20 largest shopping centres in the UK generally have a vacancy rate of 5% or less. Westfield London and Stratford City are virtually at full occupancy with less than a 1% vacancy rate.

Secondary and tertiary centres, by contrast, are feeling the brunt and weak occupier demand is stagnating rental performance. The power appears to sit in the hands of the occupier, and as shopping centres are eager to retain or attract the best retailers, it often means charging competitive rents.

So what are the prospects for secondary schemes?

Higher yield acquisitions have potential to offer greater returns if combined with strategic asset management. The business model of NewRiver Retail, owner of 24 shopping centres, is to drive income returns by targeting higher yielding assets, adding value through active asset management. However, it must be stressed that investing in secondary centres is not for the faint hearted as it is management intensive and very much for specialist investors.

F&B to the rescue?

Developing an F&B and leisure offer can help to rejuvenate secondary centres, helping to increase dwell times, creating an all round better shopping experience, boosting footfall and therefore rents in due course.  The internet has cut the need for people to leave their home to shop but it cannot satisfy the UK’s desire to eat out. While retailers have faced problems through the downturn, the restaurant and leisure markets have remained comparatively stable. Prior to the recession, the leisure element of Trinity Leeds shopping centre was planned at 10% but since completion in 2013, 24% of units are designated to food and leisure. F&B and leisure play a larger role in prime centres compared to non-prime assets.  A recent study by the BCSC reported that shopping centres allocate 8% of units to catering and this rises to around 15% for larger, prime centres. 

Over the recent years we have seen a high number of acquisitive F&B and cinema operators, providing an alternative tenant for landlords in a climate where retailers are consolidating. Crompton Place in Bolton, for example, has secured planning permission for a cinema in a vacant former TK Maxx unit. While a number of large, regional shopping centres are having leisure extensions, smaller centres such as Legal & General’s Dolphin Centre in Poole and Eastbourne Arndale have extensions planned for cinemas and restaurants. Online retail offers consumers convenience, which is also an advantage offered by small, local shopping centres, in addition to a convenient location for click & collect amenities.

Problems continue to face the retail sector, but the weight of investments into prime shopping centres shows confidence in the market. Although there is polarization within the sub-sector, the UK’s growing economy should hold healthier prospects for secondary assets with the right strategy.


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