October 12 - Blood on the High Street, but you can still shop for bargains
Where in the UK, outside Central London, can investors find value, such that attractive returns can be expected in the medium term? Here are some Sanders Cartwright observations on the main UK sectors.
There is a good case for prime Grade A product provided passing rents are not too elevated. This is particularly so in Edinburgh where the reducing supply creates an interesting dynamic moving forward. Investors will be wary of any stock outside this top spec category, as obsolescence and non-recoverable outgoings will impact on cash flows. This will be more painfully felt early next year when Scottish Parliament looks set to follow the (plainly wrong) example set by England on Empty Rates : while England and Wales presently pay 100% rates on most empty commercial buildings, it is now widely anticipated that Scotland will increase Empty Rates from 50% to 90% - listed buildings and industrials should continue to attract full relief.
On typical pricing for multi let offices, we are far from convinced that these burdens are properly factored in. We expect continuing outward movement, before most of these deals begin to look attractive. Aberdeen, of course, with its unique market, can justify a more positive approach.
Examples in Glasgow of high quality product include141 Bothwell Street bought at the turn of the year by Pramerica REI and the G1 Building in George Square acquired last month by Union Investment RE, both German investors. In Edinburgh, the Waverleygate building in Waterloo Place has just come to the market
Scottish industrials are set to enjoy a significant advantage over both English industrials, and other commercial sectors in Scotland. They are expected to enjoy full relief from empty rates, which should make a real difference in any cash flow for multi lets. However, despite this most sellers’ aspirations remain too high. Prudent investors are struggling to see adequate returns if they factor realistic assumptions on voids, rental levels, lease lengths and incentives to occupiers. Pricing is going to need to move further out, before we will see many transactions. Notable exceptions include Aberdeen, and well located good quality stock in the Central Belt. Examples of recent acquisitions include City Link Central in Govan and Blackness Industrial Estate in Altens, Aberdeen both acquired by CBRE Investors.
Over-provision of shopping throughout most of the UK, the continuing rise of internet shopping, and the recent demise of so many UK retailers requires investors to take a careful view of High Street retail.
However, we notice particularly in this sector that rents are often being set at sensible post-recession levels, typically at half or even less than where they peaked. Investors should focus on well configured units in a strong retail pitch, low commencing rents, and hopefully a good few year’s income to a sound covenant. Provided the initial yield is fairly generous, it should be possible to indicate attractive returns in this sector.
We have been busy acquiring this sort of product for clients this year. In Aberdeen, Kames Capital acquired in March 107 – 115 Union Street let to Shoezone and Phones 4 U. Positioned in the prime block the larger shop newly occupied by Shoezone is let off a comfortable headline rent of circa £80.00 psf Zone A, compared to £135.00 at the peak. Once the rent free expires the running yield will exceed 8.25%.
Also in March we acquired 74-78 High Street in Falkirk for a Glasgow based private investor, again occupying a 100% pitch. Newly let to HSBC off only £36.00 psf Zone A, compared to double that at the peak, this provides a very comfortable entry price for the investor with real prospects of growth in income.
Finally, we have just assisted Henderson Global investors in their acquisition of 9 Argyle Street in Glasgow, newly let to Sainsbury’s Supermarkets Ltd. Directly opposite the M & S flagship store, the commencing rent reflects only £64.00 psf Zone A compared to around £150.00 psf previously. Providing an initial yield in the region of 6.35% - 6.40%, Henderson are set to enjoy recession proof performance with this buy.
While Aberdeen and Falkirk were acquired at close to 50% of previous pricing, Argyle Street was bought for around 36% of the price understood to have been paid for the property in 2005.
It is easy to sit and wait for further price slipping across all sectors. However, there are a few sound well priced opportunities now, and when the market at large eventually recognises that the worst is over, it might just as suddenly find that it has missed the boat. It is a real challenge though to find opportunities among so much mis-priced stock. Brutus understood this in Shakespeare’s Julius Caesar. Had he instead been a property investor in 21st Century Britain, he would be busy buying now :-
There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures
Graham Sanders October 2012