New evidence is emerging that struggling high-street shops are proving unpopular with property investors. This is according to the Q1 2009 Investment Bulletin released by CoStar, the UK's leading provider of information services to commercial real estate professionals.
The economic downturn has forced most commercial property investors to either cease trading or sell assets at a considerable discount. CoStar has tracked over £19 billion of investment deals since January 2008. Analysis of these trends in CoStar's report shows that the market has averaged just fifty deals per month in 2009, compared to almost twice that over the course of 2008. However, March and April have seen a pick up in activity, as some cash buyers are enticed by falling prices. The majority of deals taking place are below £25 million, but there is nonetheless a consensus that the bottom of the market is within sight.
"With so few deals being done," comments Paul Marples, managing director of CoStar in the UK, "there is a huge interest in who is buying what. Retail as an asset class has been stagnant for a couple of years now, but it appears that high-street shops, in particular, are unpopular with current buyers. In the first quarter of 2008, the high street comprised 70% of all retail deals by number and 40% by value. In the first quarter of this year this fell to 60% by number and just 15% by value."
CoStar offers several reasons for this decline in activity. "The problem lies with the diversification of income risk." continues Marples. "A high-street shop let to one tenant is riskier than a shopping centre let to many. This is particularly true in the current environment where big name retailers are going bust at an alarming rate. And last year's unfavourable change to empty rates legislation also deters property owners from relying on one single tenant."
Senior analytics manager Simon Marx warns investors of the danger of focussing too heavily on other types of retail. "Given the poor expectations for price growth, rent from tenants is the landlord's only income. Over the last few months we have recorded a much higher proportion of new availability listings in shopping centres, retail parks and other out-of-town shops as opposed to the high street. This will no doubt cause investors some concern."
Marx continues, "People are quick to call the end of the high-street shop, but the format has withstood the emergence of shopping centres, retail parks and internet shopping." CoStar therefore expects high-street shops to recover in due course. Retail rents have resilient characteristics, as sought-after high streets have inherent constraints on space. And over the longer term, retail tends to outperform the office sector. Marx continues, "Retail assets may continue to struggle in the short term, until the consumer returns to its spending habits of the past. And that won't happen until confidence picks up on the back of an upturn in either bank lending or in house prices."