Unibail-Rodamco has agreed an £18.5bn purchase of Westfield. Hammerson is set to buy Intu in a £3.4bn deal. On the other side of the pond, Brookfield is trying to buy GGP for $15bn.
So with all this action, does this show the retail investment market is hot and that the dismal fortunes of the sector are overblown? If only it were that simple.
Putting the mega corporate deals aside for a moment, according to EG data, the UK shopping centre direct investment market is headed for its lowest level of activity this decade having fallen 54% year-on-year from £2.7bn to £1.2bn. The underlying market has been well and truly constipated with particular concern around the sustainability of secondary and tertiary assets due largely to the prospect of retailer insolvencies.
But in 2018 something will have to give. It has already been announced that the Hammerson/Intu deal will see a sell-off of £2bn of assets.
There may be some fringe fall-out from the Westfield deal – its Bradford centre sticks out like a sore thumb – but most importantly, the swathes of centres in the clutches of private equity firms will have to be sold sooner rather than later as they come under pressure to return cash to investors.
This could be a chance for investors to consolidate those centres and form new platforms as returns in other sectors become excruciatingly slim.
“Do you want to pay a 4% cap rate in offices or 10% for a shopping centre?” muses one senior lender.
“Shopping centres are the new logistics. Get in while you can,” says a major wealth fund manager looking to offload assets, only somewhat tongue in cheek.
Offsetting concerns
In the logistics space it was Blackstone that took the big, bold call of paying what then seemed like big money (and now seems like small fry) for assets as it built up Logicor. You blinked and the market had moved.
“If you look at what catalysed the debt and equity markets in the turgid space that is industrial, Blackstone got things going as they wrote everyone else’s investment thesis for them. Maybe that’s how it happens here.”
The only problem is that the likes of Blackstone, which owns Multi, Blanchardstown in Dublin and St Enoch in Glasgow, are not really starting from zero (albeit there is a continued flow of new capital coming in from fresh funds). Cerberus and Lone Star too, which naturally might be considered major consolidators, already have substantial and difficult UK retail portfolios.
The bringing together of these firms do little to offset the concerns around the market. The bringing together of the world’s top centres (and the selling off of the less shiny ones) only reinforces the mantra that fortress malls will dominate and weaker centres fall away rapidly, bludgeoned by online retail and the demise of the department store.
These mergers will at least, it is hoped amongst brokers, set a level or pricing that buyers and sellers can hang their hats on.
The major grumblings throughout the year from deal starved agents has been that because there have been so few comparables there has been a reluctance for owners to come out from the cold and openly put assets on the market.
What’s in store for 2018?
UK institutions have been almost entirely absent from the buyer list in 2017. They may be lured in a little more in 2018 by the decent yields better secondary centres will throw off, but they will no doubt be extremely selective in putting down Granny and Grandad’s money amidst tribulation over the prospect of occupier defaults.
NewRiver, arguably the most resilient company in the whole of the property sector, has long been licking its lips to pick off bargains from private equity firms to snap up the best of what is being sold with its Midas touch. It has been sitting with £165m of equity to deploy since its last capital raise in the summer, but it will not be able to prop up the market by itself.
Councils have been the most active buyer group this year and there appears to be no stopping their own desire to plug gaps in their budgets through buying property, particularly centres local to them where they can have a positive impact through regeneration. Although there is the lurking danger that they may have the rug pulled from underneath their feet by central government, as has been warned by the Treasury.
Some international and private capital lured by the yields on offer will poke around with Wirefox and Talisker Corporation regularly seen on shortlists for what little has trickled on to the market this year, but it is difficult to see deluges of capital desperate to get in.
The true tertiary dross that will come to the market, typically sucked in by private equity firms as part of giant non-performing loan portfolio, will have to be jettisoned at a loss as they run out of time and options with the luckier sellers having made substantial profits elsewhere in the portfolios.
Other PE investors starting again from zero will be those that emerge from the undergrowth hoping to have another go at drastically repositioning – or perhaps knocking down – such centres.
The mega deals between Intu and Hammerson, and Westfield and Unibail, might not might not cure the fundamental ails of retail, but it would be astonishing if there were not more action in 2018 than there has been the past 12 months.
To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette
