Shopping for value - are we about to see a resurgence?

Author: Peter Rose

With reports suggesting that shopping centre values have bottomed out, are we about to see a resurgence in retail investment activity, asks Pete Rose, head of UK at Forbury Valuation Software?

In recent years, the ongoing online retail revolution – recently accelerated by Covid – has driven the value of the UK’s shopping malls and high streets to record lows. But a recent report by property consultancy, Lambert Smith Hampton, suggests that the worst may be over.

The report reveals that, on average, shopping centres have sold for 58% less than their original purchase price over the past two years. The reality is even more stark when inflation is factored into the equation, especially for assets bought over a decade ago.

This performance, along with the structural changes taking place across the retail landscape, paint a grim picture for shopping centres as an asset class. Meanwhile, investors are left with something of a conundrum; do they force a sale in a depressed market, or do they hang on and risk values falling even further?

Though institutional investors have, by and large, cut their losses, there are some examples of bolder behaviour. Landsec made its position clear towards the end of last year when it opted to increase its stake in the Bluewater mega-mall, netting itself an estimated 30% discount on 2014 values in the process.

Another signal that values have all but bottomed out is the emergence of private equity players into the shopping centre arena. With a recent report in the Times suggesting that nearly half of UK shopping centres require demolition or repurposing, there is clearly a development play for those with an appetite for risk. Given that many shopping centres occupy prime town and city centre locations, it doesn’t require too vivid an imagination to see the potential for conversion to other uses, including residential, last-mile logistics and education/R&D.

The role of local authorities is becoming an increasingly significant influence on shopping centre values. Back in 2003, The Local Government Act allowed local authorities to borrow money to invest in income producing assets in order to off-set future spending needs. This, in part, fueled the shopping centre investment boom of the early 2000’s as additional, well capitalised players entered the fray.

Today, however, their motivation has changed. Faced with the decline in town centres and high streets, many local authorities are talking control of shopping centre assets as a catalyst for wider regeneration plans. With few private sector players able to take such a long-term view, local authorities are likely to be the saviour of many struggling schemes.

With the benefit of hindsight, it is easy to now see that the UK shopping centre market had become wildly overheated by the mid-2010’s. Few investors predicted the impending seismic changes to a nation’s shopping habits and the real estate industry, as a whole, was slow to adapt.

Having now undergone something of a price correction, there are potentially exciting times ahead for the shopping centre sector. Assuming the worst of the pain has already been absorbed, the right centres, acquired at the right prices and subject to a little vision and innovation, could just emerge from the wreckage stronger and better positioned for the future. Though a number of centres seem unlikely to survive the revolution, the land is likely be put to better use in many cases and the best of breed will continue to evolve and offer a physical experience that meets demands that cannot be fulfilled by online alternatives.

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