November

The announcement in yesterday’s Spending Review that local authorities will no longer be able to access cheap debt from the Public Works Loans Board for yield arbitrage purposes has to be welcome news – if for no other reason than financial stability. Over a three year period from 2016, it is reported that local authorities spent a staggering £6.6bn on commercial property with almost 40% being outside of their boundary. For those who chose to “invest” (poor choice of terminology) in the retail sector, the outcome could prove to be a disaster for their finances. The fact that Croydon council has effectively declared itself bankrupt after taking loans of £545m to buy a shopping centre should serve as a warning.

It is estimated that over this period, a quarter of the investment activity was directed to the retail sector – and particularly shopping centres. Within our region, top of my list of atrocious investment purchases has to be Shropshire Councils purchase of the Darwin and Pride Hill Shopping Centres – yes – not one, but two shopping centres. In fairness, these schemes had been touted as a redevelopment play, but in my mind if the combined development experience of Shearer Property and the financial clout of Standard Life could not pull it off, why did the council think they could do otherwise?

Now, I am aware that not all purchases will have been made with Prudential borrowing. I am also in favor of councils being able to access cheap money if it genuinely acts as a catalyst for regeneration (the clue is in the name – “public works”). Everyone knows that the viability of development is challenged from the outset when there has to be a destruction of value to create value. Unfortunately, many councils make this equation even more difficult by paying too much for their shopping centres. Furthermore, with a recent survey by Korn Ferry predicting that over a third of retail bosses are expecting to reduce the size of their store portfolio within the next 12 months, an increasing queue of retail owners seeking to enhance the value of their equity stake through the use of CVA’s and shopping centres not being conducive to the surge in demand for click and collect facilities, the short term prognosis for value is bleak.

Looking forward, many town centres will continue to decline. One way or another, it will require local authorities to take a leading role if the decline is to be arrested. If you are a local authority contemplating an intervention into the retail market, never before has it been so important to obtain impartial professional advice before committing to a purchase (and a debt). Timing is everything. Knowledge is key.

We are pleased to report that we have exchanged contracts to forward sell a new Costa Drive Thru in Scarborough. Acting on instructions from Rothstone Developments, we agreed the sale to clients of Prideview at a price reflecting a net return of 5.50% for 10 years term certain of income. Works are about to commence of site with practical completion expected in the Spring of 2021.

With interest rates close to zero, it is very difficult to secure decent income returns – let alone one that shows a positive return in real terms. In this case, the investment provides more than just secure income. The property caters to the expanding market for convenience and the site fronts onto the busy A64. It is adjacent to a Morrisons Supermarket and a McDonalds Drive Thru – hence there is customer throughput. Therefore, where the fundamentals are strong investor demand appears to be strong. We do not anticipate this changing for the foreseeable future.

Chapter 2  – The Rise of Independence.

Three news stories published this week have reinforced our belief that there is hope for the High Street  – in the form of the independent retailer. As the national brands grapple with legacy issues and adapting to the digital age, independent retailers have shown themselves to be more agile.

Firstly, M&S announced their first trading loss in 90 years – £87.6m. This was attributed to a poor performance in Clothing and Home sales. The bright star was the continuing strong performance in food sales – up by 2.7% and expected to accelerate as the company reaps the benefit of their new trading relationship with the online platform – Ocado. According to Steve Rowe, the CEO, Covid has forced the company to implement three years of change into a single year. The company has allocated £120m to fund further store closures.

Secondly, a report from Local Data Company (LDC) confirms that small shops have been better at surviving the virus than big ones. LDC have been studying the performance of the top 500 Centres (frankly, I didn’t know there were that many!) for the past decade. For the period January to August, they reported that there had been 31,139 store closures and a net decrease of 7,834 shops. However, independent businesses declined by 0.54% compared with 2.77% for the national chains. Admittedly, the picture is still one of consolidation but that must be expected with the impact of lock down.

Finally, Sainsburys announced the closure of 420 Argos Stores by March 2024. They will partially be replaced by 150 new Argos outlets in store at Sainsburys. To make space, Sainsburys are scrapping their meat, fish and deli counters. The company claims to be responding to changing consumer demand – the customer does not have time to queue. I would contend that Lidl and Aldi trade extremely well without the expense of operating such facilities and they are a luxury that Sainsburys cannot afford in the low margin world of groceries and a migration towards online deliveries. However, we also believe that provenance, choice and cost remain important considerations for consumers and this creates an opening for the independent butcher, fishmonger and delicatessen.

So what does this mean? The national multiples will continue to reduce their physical presence on the High Street. They will in part be replaced by independent retailers who are able to tailor their offer to local need and react quickly to satisfy emerging trends. They will be cost conscious…..rents will be lower…. and they will want occupational flexibility…..leases will be shorter. The combined impact will be lower capital values as investors demand higher risk weighted returns. This trend is already evident although the market is in a state of transition and the full impact is not uniform. For investors, the focus will be on continuity of income and less emphasis on lease length and covenant strength. It will be critical to understand the ability of each property to generate a consistent income – regardless of the tenant type – and to foster good relationships with the tenant. Success will be reflected in the void rate.