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OPINION

Don't bet on recovery in retail investment market

Don't bet on recovery in retail investment market
September 15, 2020
Don't bet on recovery in retail investment market

Investment activity has unsurprisingly stagnated since the end of March and although the value of deals rose to £238m in July from £175m in June, according to data from Colliers International, that was still well below the 2019 monthly average of £400m. What’s more, it was supermarkets that made headway, accounting for around 60 per cent of July’s deal value. 

Yet a small number of sales are being made - RDI Reit’s (RDI) £157m disposal of six retail parks to European commercial investment company M7 sticks out. The sale may have represented a discount to the assets’ most recently reported value - usually obligatory for any retail deal these days - but the size of the sale makes it a rare breed in recent months. 

The Royal Institution of Chartered Surveyors’ recommendation last week for valuers to lift material uncertainty clauses, put in place in the wake of the pandemic, should be welcomed not least because it will allow retail investors to access cash that has been trapped in open-ended property funds. But will it also inject some vigour into the market for retail assets? It seems unlikely. 

A lack of transactional activity has made valuers’ jobs tougher. But the difficulty in putting a price on retail property stems from the shuttering of stores and leisure facilities, as well as the long term structural battle between bricks and mortar stores and ecommerce, which has made calling the bottom an almost impossible task. When property values could fall further, how do you know whether you’re getting a bargain?

The end of the furlough scheme and the cost savings that brought with it, will add further pressure to tenants and could cause an increase in rent defaults. While the ban on winding up petitions and lease forfeitures for occupiers that have not paid their rent is due on 30 September, landlords may be reluctant to take back properties as the pool of potential new tenants dwindles. 

Lease negotiations seem more likely. But against this occupier uncertainty, rents will continue to rebase rapidly, with Knight Frank predicting that capital values will naturally follow suit.