Private investors rush to secondary retail as quest for higher yields continues

Despite the challenges faced by the UK retail sector as a result of the pandemic and changes in consumer buying habits, the secondary retail market has been remarkably active over the past few months as investor appetite for opportunities with the potential to add value shows no signs of abating.

What makes secondary retail appealing is a combination of factors, which include attractive pricing, high yields, and most recently, the news of the UK vaccine roll-out, which has provided reassurance and much-needed comfort to the investment community.

The opportunity to re-position such assets and maximise long-term returns is a big advantage that not all property assets are able to offer, and this option makes secondary retail a particularly interesting investment. Those who decide to invest in retail premises have a range of options available to them, often including converting upper parts of the building for residential use or using any surplus land to build additional units adjacent to the main property.

Over the past eight weeks, we’ve worked on 10 transactions involving this asset class, resulting in the sales of shopping centres in Tonbridge, Dronfield and Hillsborough, and high street retail parades in Retford, Hull and Cardiff. The Pavilion Shopping Centre in Tonbridge was sold on behalf of Columbia Threadneedle Investments for £5,500,000, offering a 10.5% triple net yield, which was the main initial draw for the buyer. Furthermore, they identified an opportunity to convert a part of its first-floor retail storage space into residential accommodation. The building’s proximity to the local train station has played an important role in these plans, with good transport links known to be adding a premium to the value of a property.

Among the other secondary retail assets snapped up by savvy investors over the past few months is Grand Buildings in Hull – a prominent city-centre site with attractive public realm facilities. Currently let to six companies, including Lloyds Bank, HSBC, Halifax, Slater Menswear, Blacks Outdoor, and Waterstones, it was sold for £3.65m, with a net initial yield of 14.1%.

Such transactions seem somewhat counterintuitive given that purchasers are prepared to commit to a deal fully aware that the passing rents will almost certainly be dropping in the short-term, and bank financing for such deals is very hard to achieve.

The volume of capital available to be deployed at short notice to take advantage of the high yields on offer is impressive.

Grand Buildings, for instance, attracted four bids at or close to the asking price of £3.65m, while Hillsborough Barracks – a commercial, administrative and retail centre in Sheffield – received three offers in excess of the £4m quoting price. Finally, the shopping centre in Dronfield, a popular residential suburb between Sheffield and Chesterfield, with a guide price of £3,500,000, received interest from six potential buyers, including both developers and investors. The purchaser will enjoy the high returns on offer while also considering a modular residential development to the rear of the site.

With the huge concern over the future of retail, it is hardly surprising that so many UK companies are trying to dispose of such assets; all UK institutions are re-visiting their valuations on a regular basis, sometimes as often as monthly, which normally results in assets being downgraded. That, in turn, provides an interesting opportunity for those ready to implement a more creative approach, which could include change of use and further development. This trend is likely to continue well into 2021 as funds get more nervous about the retail sector with more and more retailers facing CVA or administration, offering potential buyers a chance to reinvigorate often tired and neglected sites.