For many cash-rich private investors the chief attractions of investing in the high street have been secure assets and reliable income. But well before the Covid-19 pandemic, a large proportion of high street investment stock was already leaving landlords exposed to significant uncertainty due to the weak occupational market. And coronavirus has pushed many high street investments even further up the risk curve.
So is there a future for the private investor to invest in the high street? And if so, what does that look like?
James Child, EG’s head of retail and industrial research, told a Future of Auctions podcast that since the start of 2018 more than 27m sq ft of retail and food and beverage space has been vacated due to CVAs, administrations and traders no longer able to operate.
He says Radius Data Exchange figures also show that more than 2,000 individual shops and eateries have been shuttered since the beginning of the year. Most experts argue that we need around 20-40% less stock, Child adds.
What’s more, Radius data shows that average lease length and average rents have dropped by around 10-12% over the past five years.
“Flexibility is key for tenants but security is tantamount for landlords, so this is the balancing act that we all face at the moment,” Child says. Nevertheless, he argues that “investing in the right assets that serve a purpose and serve a community will still generate a strong return in the short, medium and long term”. In this year of all years, localism is a theme that has really come to the fore.
It’s a scene that is familiar to Anthony Ratcliffe, partner at Ratcliffe’s chartered surveyors, which specialises in the creation and management of prime commercial property investment portfolios on behalf of investors.
“Dealing with CVAs and unpaid rent is taking up a huge amount of my time at the moment,” he says.
A post-pandemic future for high street retail property?
In the 50-plus years that Ratcliffe has been active in commercial property investment, he says normal yields have been 5% for shops, 7% for offices and 10% for industrials. Today, shop yields are around 8%, offices still around 7%, and industrials at an unprecedented 4%, as this stock is repurposed for online sales.
US politician Donald Rumsfeld famously said there are known unknowns, but there are also unknown unknowns. Ratcliffe says: “Rental values post-pandemic are unknowns and, as a consequence, so are the capital values.”
Private investors are now seeing high street retail investment opportunities to buy at auction at prices around 40% below traditional pricing norms. “So if a good high street shop investment can be bought today to show say 9%, with four years left on the lease to a reliable covenant, will the lease renewal at the then-prevailing rental value four years hence, giving a yield reduced to say 4% or 5%, be regarded as a good return, benchmarked against other asset classes or other property sectors?” Ratcliffe says.
“We do not know – it is an unknown unknown, but the private investors currently so active in the auctions seem to think that is a fair bet – and so do I.”
So what is selling?
Richard Auterac, chairman and auctioneer at adviser and auction house Acuitus, says the number of those wanting to buy exceeds the number of those wishing to sell.
Long leases to good covenants remain highly sought after and would command the same yields as in 2018 or 2019. But they are a rarity and owners are unlikely to sell at the moment.
He says demand has also been maintained for investments in the Greater London area, where it seems investments do not necessarily need a long lease and a good covenant to generate very low yields.
Several examples from Acuitus’s September and October auctions highlight this: lots in Golders Green, NW11, Wimbledon, SW19, and Mill Hill, NW7, each sold at sub-5% yields, while a fourth, in Raynes Park, SW20, sold at 6.5%.
“I would doubt that we would have got any better price in any different market,” Auterac says. Crucially, each of these has residential uppers or the potential to add residential.
“This is what the savvy investors are looking for – the potential to sweat the upper parts,” Auterac says.
However, the picture is quite different in the cathedral cities and affluent market towns, where private investors have traditionally been highly active buying institutional-grade stock.
Recent examples in Chichester, Guildford (pictured) and Cambridge sold at 8-9% – a level previously unheard of. Let to Paperchase, Estée Lauder and Bank of Scotland respectively, the leases have between four and seven years left to run.
“When you start looking at what the rent is going to be on renewal, one could say ‘Well, that equivalent yield will probably drop to maybe 6%’. But again, it’s the unknown unknowns. What will happen when that lease expires in two years’ time? It is the uncertainty that drives the prices lower.”
But the biggest hit to values has been felt in the secondary towns. These used to be regarded as offering institutional-quality stock but they now face the greatest uncertainty about the continued occupation of the national multiples.
A 5,000 sq ft Waterstones in Bedford sold for just £411,000. This reflects a yield of just 3.5% because in order to keep the tenant, the landlord had agreed to a new three-year lease, with mutual rolling break options, at a modest rebased rent of £15,000 pa. Waterstones was previously paying £40,000 pa.
Similarly, competition for an entire 5,000 sq ft building in Gloucester was not enough to push the investment further than £236,000, a 15.5% yield. “People just don’t know where these sorts of locations are going to end up,” Auterac says.
Key areas of concern
Clearly, Covid-19 has had a massive impact on private investors and commercial property. One area which is causing significant uncertainty is the moratorium preventing landlords from exercising a right to forfeit or repossess their premises for non-payment of rent.
This has led to a number of tenants – including high-profile blue-chip covenants – delaying payments or not making payments at all, regardless of whether they can afford to pay the rent. This has left landlords in a very difficult position when coupled with the risk of CVAs, says Vijay Parikh, managing partner and head of commercial property investment and auctions at law firm Harold Benjamin.
As a result, private investors who used to focus heavily on investments with blue chip covenants have been switching their attention to local covenants as a safer bet. “They know whether or not a particular tenant will be able to pay the rent just by looking at how many people are coming in and out of their shops,” Parikh says.
The strong performance of local high streets during the pandemic has also contributed to this shift towards localism.
“I can certainly foresee that there is a future for investment,” says Parikh, “but it is about the opportunity to look at the local tenants – those tenants who are going to meet the obligations of their rents. It’s also about looking at the alternative uses of the upper parts.”
To send feedback, e-mail julia.cahill@egi.co.uk or tweet @EGJuliaC or @estatesgazette
