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A Blow to Retail Investor Confidence

24/03/2020
Some long awaited confidence had begun to return to the retail capital markets at the beginning of the year with many transactions going under offer and a number exchanging after the prolonged slow down in H2 2019 caused by Brexit uncertainty and the run up to the general election.

The majority of this activity has been in out of town retail parks, the segment of the market that was perceived as being oversold and one of the more resilient to the rapidly changing retail environment.  

Over the course of the last two weeks the market has been turned on its head, bringing to an abrupt end what many perceived as a potential recovery in the capital markets. There is considerable uncertainty across almost all of the retail subsectors as landlords and occupiers engage in intense negotiations to try and settle rental concessions ahead of the March quarter day – against the backdrop of increasingly absent consumers and as of last night enforced store closures. It is inevitable that the current events will bring about or bring forward further casualties that will put increased pressure on long suffering retail landlords. 

We have seen a small number of transactions that were at a very advanced stage actually exchange following some renegotiation in the first week of March. Conversely a number of deals have fallen over and are unlikely to be resurrected. However for the majority of transactions where there are still willing purchasers we are now in a period of stagnation, with a freezing of activity as buyers watch the next few weeks and months play out against the backdrop of political intervention and increasing economic uncertainty.

Forecasting the fluctuations to short and medium term income streams with any degree of accuracy across shopping centres, high street units and retail parks has now become virtually impossible and until some stability and clarity resumes and stores generally reopen transactions are highly unlikely to proceed. 

Lenders have naturally become increasingly uncomfortable to take on the heightened risk and therefore transactions requiring debt will not be moving forward in the short term. A number of buyers who have properties under offer still appear willing to advance their acquisition due diligence in the hope of being able to conclude transactions as soon as they feel comfortable to do so.

Looking forward over the coming weeks and months we do not anticipate any new sales being launched and therefore expect a relatively inactive Q2. Thereafter we envisage a gradual improvement both in terms of new sale launches and transactions concluding should there begin to be a return to some ‘normality’ and an improved predictability to income streams. We foresee transactions volumes being mooted and potentially down on 2019 unless some significant corporate activity and further pricing adjustment makes investment into retail seem very good value relative to other sectors. Clarity around subsector pricing and yield movement will only improve with an uptick in activity and we may have to wait until Q3 before this materialises.

The positive news is that there are there are a number of longer foodstore indexed income transactions likely to conclude in the near future as they are seen as ‘safe haven’ investments and we are also experiencing strong interest in medium term redevelopment plays where genuinely well located real estate is involved. In addition we are aware of a number of DIY solus transactions that might proceed highlighting the relative income security and lease length on offer. The pricing in these specific areas has remained comparatively firm with very little, if no outward yield movement.

 
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