EDITOR’S COMMENT Having cut my teeth at EG in retail, I got a little warm fuzzy feeling when Landsec boss Mark Allan started talking about the return of the sector and how the REIT was readying itself to invest the majority of its £1bn of fresh spending money back into shopping centres.
When I joined EG back in 2004 (I know!) retail was having a grand old time. Everyone was building and buying.
I lost count of the number of stories I wrote about retail developers planning on building £1bn portfolios (remember Modus?), big money transactions, and those amazing anchor tenancy deals that landlords would fall over themselves to give to John Lewis.
Then it all changed. Retail was so out of favour it almost became a swear word.
But now it has turned a corner. The sector has re-based and while there are elements of the market and places up and down the country that were over-retailed that will never quite bounce back, there is growing evidence that the sector is worth investing in again.
Let’s take Landsec’s recent commitment to plough around £600m into quality retail destinations.
That commitment has not come because it thinks it can pick up a bargain – although I’m sure it would love one. It has come because it is seeing the fundamentals of place and product shining through.The right retail in the right place is growing. There is demand for quality space and quality catchment. And retailers are willing to pay for it.
According to Landsec’s recent results, rents are rising. It reported a 2% uplift on reletting and £37m of new deals being secured at 6% above ERVs.
Major retail also saw one of the smallest dips in valuation across Landsec’s portfolio in the 12 months ended 31 March, declining by just 1.1%. This compared with a 6.9% dip in central London values and a 14% drop in the value of its mixed-use portfolio. Occupancy is strong too at more than 95%.
These are reasons to be cheerful about retail.
And it is not just Landsec seeing a resurgence. While British Land may be moving out of malls and into more retail parks (where conveniently Landsec is selling), its sale of its half share in the 1.4m sq ft Meadowhall to its partner Norges Bank Investment Management underlines the wealth fund’s commitment to good, big retail.
“Despite being out of favour, we remain confident in the prime shopping centre sector, where rents and yields have rebased significantly,” says head of UK real estate at Norges, Jayesh Patel, after splashing £360m to take full ownership of the mall.
Norges needs to be confident. The shopping centre, valued at between £720m and £734m depending on whether you believe the vendor or buyer’s valuer, is encumbered with £426m of debt. That’s around 60% of its value, which ever you choose.
Retail’s resurgence offers a great lesson for anyone operating in real estate today. It is a reminder that this industry is – and always has been – cyclical. It is comfortingly predictable.
What goes up, always comes down, eventually. What comes down, always goes up, eventually.
But it has to be the right asset, in the right place. It has to be thought through, cared about, connected to the places and spaces and people around it.
Be thoughtful, do your homework, think about what you are delivering for a community as well as for your business, because ultimately it is that thought, that intelligence that will impact your bottom line.
And if you get that right, everything comes back. Even retail rental growth.
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