The Week: Is value emerging in retail property?

The UK’s retail property sector has been tough, but is now attracting interest from across the pond

  • Active commercial property managers have generally avoided the retail property sector
  • Tenant demand has slumped as high street retailers have tried to adapt to the commerce era and retail spending has been slow
  • However, new interest from Pimco suggests value may be emerging
     

While returns from commercial property have held up surprisingly well in the two years since the EU Referendum, it is no thanks to the retail sector, which has been moribund. Active commercial property managers have generally avoided the sector, focusing their attentions on the more buoyant industrial and office sectors. But are the fortunes of retail property about to change?

The demise of retail property has been well told. Tenant demand has slumped as high street retailers have tried to adapt to the commerce era. Landlords have been forced into CVAs by tenants on the verge of bankruptcy. It has become clear that UK retail is generally over-supplied and rents and capital values have reflected that.

There is little sign of these pressures diminishing. The march of ecommerce isn’t about to end, while consumer sentiment remains poor in the face of uncertainty over Brexit. While not all retail is obsolete, there are areas that still look extremely vulnerable. 

However, new interest from a US private equity-style fund run by Pimco suggests there may be value emerging. It has established a joint venture to acquire UK retail properties. The NewRiver Reit has teamed up with BRAVO Strategies III LLC to invest in retail parks and other retail properties. Its first investments will be four retail parks in Aberdeen, Inverness, Dundee and on the Isle of Wight. 

There are also signs that commercial property managers may be changing their tune. Industrial property looks increasingly expensive.- as one manager put it: “Nice to hold, horrible to buy”. Equally, the office market could be subject to as much disruption as the retail market, as companies increasingly embrace hot-desking and home working, facing down threats from companies such as We Work. Yet, as it stands, this is not reflected in prices in the office market, whereas retail has come down a long way.

Picking the right retail property is still a minefield and there are still toxic assets in the sector, but value is starting to emerge. It still offers high yields for those brave enough to buy in.

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