Shopping center transactions in United Kingdom, Q4 report from Knight Frank (UK)

Buying opportunities for good quality shopping centre assets are likely to remain restricted over the next six months and, following the return of a broader range of investors to the market, further yield compression is assured.

Following the downturn the banks are significant holders of UK shopping centers. Their actions will be fundamental to transactional activity in 2010 as they look to restructure their property loan books. However, activity is likely to remain relatively subdued, as assets may be released to the market selectively in order to maximise value. Many retailers enter 2010 in a positive mood following strong Christmas trading, with little expectation presently that high profile business failures will take place. Retailers are cautiously optimistic about the trading outlook this year, albeit spending cuts and tax rises anticipated post election may well slow consumer expenditure growth.

Market commentary
2009 ended strongly with Q4 sales volume of £699.1million, (€810.9 mln.) more than double the Q3 total. The 2009 total volume of £1.92 bln. (€2.22 bln.) eclipsed the 2008 total by 32%, but it was nevertheless a subdued year with just 21 deals taking place, one fewer than 2008 and the lowest of any year on record. However, nine of these transactions completed in Q4, which was the most to occur in any quarter since Q4 2007.

The headline deal in Q4, and the second largest transaction of 2009, was Lloyds Banking Group's £297 million sale (€344 mln.) of the Silverburn Centre in Glasgow. The regional shopping center, which opened in 2007, was purchased by Hammerson in a joint venture with Canadian Pension Plan, reflecting a net initial yield of 5.92% and demonstrating the strong investor appetite for prime shopping centres.

Investor sentiment at the end of 2009 stands in marked contrast with earlier in the year. In the first half of 2009, opportunity funds and overseas cash rich investors were the only acquisitive players in the market but, by Q4, interest for good quality assets had returned among a broader spectrum of investors, with renewed appetite from UK funds followed more recently by the UK REITs.

Problematically, however, the increased weight of money seeking good quality shopping centre assets has coincided with a diminishing number of buying opportunities. A host of assets were withdrawn from the market in the latter half of 2009 and, at end Q4, just four were available with a combined quoted sales value of only £269.6 million. This is in complete contrast to Q4 2008, when 25 shopping centres were available at a combined £2.24 billion.

The growing disparity between demand and supply led to further inward yield shift in Q4 2009. By year end, prime regional shopping center yields stood at 6.50%, hardening by a further 35bps from Q3. Significantly, yields on secondary shopping centres also hardened, from 9.50% in Q3 to 9.00% in Q4, as investors started to look for 'riskier' assets to obtain greater value and yield.

Highlighting the current strength of demand, 10 shopping centers were under offer at the end of 2009, the most since Q4 2007. One example comprises the Darwin, Pride Hill & Riverside Shopping Centre complex in Shrewsbury, where bidding significantly moved ahead of the original asking price. Placed on the market by administrator Hatfield Phillips, the asset is under offer to Ignis Asset Management and Shearer Properties for c.£61 million, reflecting a net initial yield of 7.50%.

In a market starved of supply, the Mall Fund appeared to be most active vendor in Q4. In addition to its £98.0 million sale of the Mall in Bexleyheath, a number of other assets have been placed on the market, with the Malls in Preston and Aberdeen both currently under offer at c.£83.0m and c.£45.0m respectively.

According to IPD, average capital values for shopping centres moved into positive territory in the autumn, recording 5.6% growth since August, following a substantial 51% fall in values after the peak of the market. Occupationally, however, shopping centre rental growth has decline

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