Are shopping centres a busted flush or Pandora’s Box for the private investor?

Secondary and tertiary shopping centres across the UK are not everyone’s favourite investment, it’s fair to say. For many - mostly corporate – investors, they see schemes that bear a long history of sales at ever decreasing values as the income streams have faltered and landlords’ costs have escalated.

And yet, look beneath the surface, and it’s obvious that that narrative isn’t felt so strongly in some quarters as in others. There is liquidity in the market, as evidenced in the volume of sales we’ve seen, and that is particularly evident in the rising share that the auction market is taking. Allsop alone is responsible for 25% of the shopping centre sales in the sub-£10m sector.

So, one might say it’s obvious why people are selling. But why are others buying? Is it all about the price?

Why falling values are enticing private investors

The publicly available history of falling values present, in many private investors’ eyes, an enticing opportunity to purchase at a level significantly below the historic trading price and at only a fraction of the original, or present, build cost. This explains why, in many instances, an enquiry from a previous owner of the scheme is one of the first calls we receive when a centre is listed in our auction catalogue, tempted by the opportunity to reacquire at a different entry point.

Investors find the yields hard to resist, with less-seasoned buyers asking, “what’s the catch?” A return of 12.5%+ is a given, and often is greater at this point in the cycle, and many of our buyers believe that there will be further upside to be gained.

Long-term, hands-on, asset management potential

Whilst many a business plan has been drawn up for a corporate approach to income profile (tenant mix, turnover rents, dare I say it spreadsheet-driven rental projections, and more), buyers see the challenge of collecting and stabilising the rents in these centres just as they do across the rest of their portfolios.

They are generally highly experienced property people, skilled at brokering deals and very effective at creating and exploiting opportunities as they arise. They don’t buy for guaranteed and easy income, but rather the potential.

These buyers are attracted to risk and in many cases are seeking diversification for their portfolios, not just in asset class and lot size but also in the associated yield. Where a more corporate buyer may see over exposure to risk, some see opportunity and, with the absence of committee papers and board approval, they have the ability to act quickly and buy in a matter of days. The Rochdale Exchange Shopping Centre for example, exchanged and completed in four days at around £5m after over 165 parties reviewed the legal papers.

Private investors are motivated by direct action, not via an agent or asset manager, and will often bring the management in-house. In the same way that they will quickly engage directly with the tenants, they believe they can too with the suppliers and service providers. These actions will help with achieving the ultimate goal of increasing efficiencies, reducing outflow, making occupational costs more affordable and attractive for occupiers, and thus stabilising or even increasing the net operating income to drive their returns.

This new class of shopping centre investor does not, by its very nature, have layers of reporting, decision makers, shareholders and investors to please, which frees them up to expend energy on the asset and make it work.

Creating value – commercially and/or societally

It’s not just private investors who are motivated in this regard to making shopping centre investments work for long-term strategies. In more than 50% of the sales we have conducted, the local council has engaged with the owner or us to express their interest in acquiring for good strategic reasons of town centre regeneration.

Likewise, even for private investors, it’s not only about the market fixation of yield or cost per square foot. Whilst alternative uses for these buildings are not always obvious, there is a significant range of views on future use potential for these huge assets, which typically extend to hundreds of thousands of square feet on a site of several acres. The increasing demand for in-town leisure hubs, the changing delivery of primary-care health services, the evolution of parking/EV charging or development of a drive-thru on surplus land can all provide opportunity.

There is cash in the auction market for anything – it’s just about pricing!

Auction buyers have no shortage of cash available for the right product. Whilst most of the market is turning away from this sector, often scarred by previous exposure to falling values and deterred by their management-intensive demands, they have found a new price-point and, and this point in their life-cycle are now exposed to a new and wide-ranging pool of buyers.

The auction market’s ability to quickly expose these complex assets directly to a list of ready buyers and achieve exchange of contracts within three weeks has been proven time and again. Whilst they are not everyone’s focus or suitable for the less experienced buyer, there remains a significant number who are hungry for more.