Richard Auterac explains why UK High Street properties are still top of the shopping list for many investors.
The 21st century has seen the market for UK High Street retail investments transformed.
The familiar line-ups of ‘multiples’ such as BHS, Woolworths, Dixons, Tie Rack, Dorothy Perkins, Debenhams, the major banks and many more have retreated from the High Street. Rents have fallen by up to 70% in many localities outside Greater London and long leases are now a thing of the past. What were once a safe bet for buyers from institutions to private investors became a minefield as online shopping ate into turnover and over-leveraged retailers crashed and burnt.
However, if you’ve monitored any of our auctions in recent times you will still see concerted buying of High Street property – and could be forgiven for wondering why!
The answer often lies ‘upstairs or out the back’ with the ability of these properties through either their upper parts or service yards/car parking to accommodate some form of residential development.
In many investments that we sell, the value of the residential now eclipses that of the retail – which is an about-face to what was seen in the commercial property investment market for most of the period from the 1960s onwards.
A more congenial planning environment, an increased desire for people to live in-town and a general shortage of housing have all come together to drive this trend.
Essentially, since the Global Financial Crisis, residential has been the saviour of huge tranches of redundant commercial space. We first saw huge swathes of regional office buildings being converted to residential through Permitted Development Rights and this trend – albeit on a small scale – is now proliferating across High Streets.
As the retail market has gone through significant downward re-pricing coupled with a tightening in the availability of finance, the residential market has moved in the opposite direction with seemingly an insatiable demand for accommodation and a strong desire by the lenders to lend. As such, residential has plugged an investment void left by the out-of-favour retail and office sectors.
Also, buying an asset which has longer term residential potential and provides ‘meantime’ income -through the rent being paid for the existing retail use – gives investors the time and financial elbow room to work up their plans without carrying all the burden of the attendant costs.
In many instances, the finished development still has a retail or leisure element as investors like the blended approach of an asset which provides income streams from two different sources – and with differing potential for future rental uplifts.
Supporting this investment strategy, our auctions represent an extremely efficient method of bringing these assets to market and enable would-be buyers to run a rule over multiple assets that are currently available.
And, as UK institutional investors continue to divest themselves of assets which no longer fit their fund profiles there should be a continued stream of these retail-to-resi opportunities.
Richard Auterac is Chairman of the specialist commercial property auction house, Acuitus and Chairman of RICS UK Real Estate Auction Group.