From correction to conviction: Investment decisions in Retail

Retail is investable again! …but only for those making clear and disciplined decisions on capital, assets and portfolios. Retail has been repriced and capital is paying attention. 

Reset in values to investable entry points  

The fall in retail values has been consistent over the last decade or so, more so in the high-street retail and shopping centre sub-sectors. However, over the two to three years following Covid, investors have increasingly perceived retail values to have reached a bottom. Investors more recently have been transacting at double-digit yields, attracted by both healthy cash-on-cash returns but also a tangible expectation of yield compression in the medium term.  

Is lender appetite returning?

Whereas lender appetite to fund retail parks remained strongly consistent throughout this extended period, certain lenders have, over the last couple of years, begun to exhibit appetite to fund both high-street retail and shopping centre assets, particularly where there is a strong food/convenience anchor tenant. This is particularly evident within the more conservative leverage lenders (e.g. high-street banks) where legacy retail non-performing loans have been purged from loan books. 

Is retail moving back into “core” lending? 

Due to the increased liquidity amongst investors as a result of the attractive entry levels, retail as a target sector for lenders has returned. It is also worth noting that this should be considered on a relative basis compared with other asset classes. 

Liquidity from lenders is generally at an all-time high across all real estate sectors. However, certain sectors present challenges. For example, the office sector where, despite recent positivity, some lenders remain cautious and ‘beds and sheds’, where competition amongst lenders is fierce. This has opened the door to an increased appetite to lend on retail assets to meet lending targets in a sector viewed as back in vogue.  

 A different model: Income is now shared, not fixed 

Along with the hospitality sector, turnover rents have now become an integral part of the retail sector and have created more alignment than was ever present historically, with downside protection and sharing of upside a clearer motive on both sides of the landlord and tenant dynamic. That said, turnover rent is not without risk, and fixed income retains obvious appeal, particularly for funded investments where certainty of cash flow remains an important consideration.

The introduction of turnover rents has rebalanced the historic landlord/tenant relationship to become much more collaborative as individual store trading is now a pre-requisite to establish an open and equitable assessment of turnover rents.  

 Is it a polarised market – where performance is driving capital? 

Whereas retail parks have performed consistently well (and attracted consistent levels of lender liquidity), this particular sub-sector could now be considered overcrowded from an institutional investor perspective. The current perception of value lies more in the shopping centre sub-sector where a more active asset management approach is required in order to drive rental tone and values. 

From a debt perspective, certain situations remain harder to finance. For example, single-tenant risk where a lease event, such as a break or expiry, could occur within the loan term and leave lenders with an income problem. This structural income profile is not unique to retail and can be seen across other real estate asset classes.

Within retail, lenders may still be cautious on high-street and shopping centre assets, particularly where long-term voids point to weak occupier demand in that specific location. A clear business plan becomes even more important in giving lenders confidence in their underwriting, including where alternative retail uses, such as food court operators, form part of the strategy. 

 Re-purposing is no longer optional – it’s the value strategy 

The decline of larger single-store department stores within shopping centres (e.g. Debenhams, BHS, House of Fraser) has opened the door to a repositioning of these larger single spaces to be repurposed into smaller retail units or even converted into other asset classes (e.g. residential or hotel). 

 As retailers rely less on upper-floor storage, driven by more efficient logistics and distribution, many shopping centre landlords are having to rethink the role of this space. For some, that means testing the viability of alternative uses, including hotel, residential or other mixed-use schemes.

Only those investors and developers comfortable with active asset management will succeed in successfully managing these assets through a period of transition. A passive investment approach will only result in more obsolete space. 

In these situations, specialist real estate advisory support can help investors, lenders and developers assess options, manage risk and protect value.

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