The BHS “blame game” is still under way, but – from a property perspective – what is the outlook for the UK retail scene as a whole?
Retail property performed strongly last year, with the recovery in capital values finally spreading beyond London and the South East as confidence grew. Broadly positive economic news in the UK has fuelled improvement in the retail trade, with a growing appetite from real estate investors for income-producing assets buoying demand in the sector.
However, against the BHS backdrop, we were interested to see the level of the Acuitus/IPD Retail Property Auction Index for the first quarter of this year. It measures the capital value change of retail properties sold in the UK at auction, so it is an interesting health check with regard to investor sentiment towards the sector.
In Q1, the index increased to 107, representing a positive change of 8.5% year-on-year, while the IPD UK Monthly Shops Capital Value Index stands 3.2% higher than it did during the same period.
This shift in positive sentiment – the RPAI showed a 14.2% increase in capital value on the previous quarter – is encouraging. Improving economic conditions, in particular in household consumption and retail sales, furnished investors with the confidence to restructure portfolios during 2015. As we have commented before, the release of short-term income investments in particular did drive a dip in the RPAI during Q3 2015, which at first sight may have appeared counterintuitive to what was happening in the wider market.
But once these weaker assets found buyers in the auction room, RPAI capital values returned to growth. Looking ahead, we expect to see further portfolios coming to market, which will inevitably include assets with a mix of risk profiles.
As a consequence, the RPAI may continue to show ongoing fluctuations during 2016. However, we believe this would only temporarily mask a strengthening in the yield of quality retail assets, which are attracting strong investor interest in the auction room as the improved economic backdrop permeates the high street.
The opportunity that investors have today is being able to invest in a redefined high street where the retail offer is changing to reflect shoppers’ demands and which, importantly, coincides with a wholesale re-basing of rents.
Retail assets have traditionally been the “engine room” of auction sales and usually represent the vast majority of lots being offered. Interestingly, though, in the February and March commercial auctions this year, they accounted for only 59% of the properties that sold. However, the average value of lots increased during the same period while the percentage of lots that sold jumped to 88% from last December’s 69%.
Investor demand exceeds the supply of stock coming to the auction room despite the fact that the total value of assets sold has grown to almost twice the long-term average.
The first quarter of 2016 saw the auction room build on the progress of last year. The sales rate was 87%, well ahead of the 78% long-run average. The lot size value of properties remains robust; the February/March 2016 average was 17% ahead of the long-term average despite a marked increase in the proportion of properties for sale from outside London.
It is this geographic perspective that is perhaps the most interesting of all these statistics. At the first-quarter auctions, only 9% of the lots sold were located in London. At the corresponding auctions in 2015, properties in the capital represented 19% of sales; in 2014 the proportion was 27%.
The commercial property auction room is now less dependent on the demand for property in the capital with investor confidence and understanding broadening across the UK. Indeed, close analysis of sale results suggests a significant hardening of yields as buyers lock into a steadily improving secondary commercial property market.
So while occurrences such as the demise of BHS will have both an impact on the retail property landscape and sentiment, there is every indication that investors are more focused on the fact that rents have rebooted, occupier demand is strengthening and a more responsive planning process is opening up asset management opportunities.
Prior to the EU referendum there was little indication that auction room buyers were being influenced by the various doomsday scenarios being put forward by both sides. Now we know the starting point for our future direction, July’s commercial property auctions will be among the first real-time indicators of how the market has responded.
Richard Auterac is chairman of and auctioneer at Acuitus
