The 4 Triggers To Watch If Retail Investment Is Ever Going To Start Again
The retail investment and development market was in the doldrums before the coronavirus pandemic began earlier this year. The closure of almost all retail and the hit to retailer balance sheets has done nothing to improve matters.
A new report from the Urban Land Institute examined the four trigger areas that could determine if the retail investment market can come back to life and undertake in earnest the process of revitalising struggling schemes. Here is what to watch out for.
The Macro Economy
Before the coronavirus, many retailers were struggling, but a benign economy and solid consumer confidence meant the majority of centres and thus retail owners were still doing well enough to be sustainable. But there was uncertainty about which retailers might go bust in future, and so people were afraid to invest.
That stasis has been blown out of the water now. According to the ULI report, a process of retail failures that might have taken years is now likely to happen in months. To get the market going, investors need to know what is a sustainable rental level, and thus what cashflow assets are able to produce. It will be some time before that is clear, because of the problems for retailers in opening their doors in an age of social distancing. But the current crisis will mean failures will be accelerated and the market will reset to a more sustainable level.
The Listed Sector
The listed sector is the canary in the coal mine for distress in retail real estate. Shares in the major European listed retail real estate companies indicate that stock market investors think asset prices are set to fall much, much further. The ULI report points out that the shares may have overcorrected, but distress is manifesting itself early in the listed sector: Depressed share prices and high leverage had forced investors to sell assets, and some companies might look to buy shares in these companies at what they consider low prices.
How banks respond to the crisis in retail real estate will play a major role in when the investment market starts to open up. The extent to which values and now income have dropped means banks essentially control the fate of billions of pounds of distressed retail real estate. There are unlikely to be a large number of repossessions in the near future, the report pointed out: To sell now into a highly illiquid market would likely mean lenders as well as owners incur significant losses. But over time they will need to deal with problem loans backed by struggling assets.
When you have significant distress in a sector or assets that need repositioning, private equity firms are normally at the front of the queue of buyers. One problem that might hinder these firms this time around is that many of them have their own exposure to the sector after making significant investments in 2013 and 2014. But the report said those without exposure to the sector, as well as other types of investor with lower return horizons, have significant capital to deploy and are starting to build teams with the expertise needed to invest in the sector when the moment is right.
That moment will not be known until it is possible to determine what an asset’s sustainable cashflow is. And that might be some while yet.