Contact Us
News

U.S. Private Equity Firms Left Holding The Baby As U.K. Mall Market Freezes Up

Want to get a jump-start on upcoming deals? Meet the major London players at one of our upcoming events!

The U.K. shopping centre market is frozen. Data from JLL shows £1.2B was transacted in the sector in the first half of 2017 — but all but two of the sales were actually struck in 2016 and drifted to close this year. A mere two shopping centres were sold in the U.K. in the first half of the year, totaling only £70M.

Big deals for the best centres are always rare. But the number of transactions for regional and secondary centres has seen a huge drop-off. That leaves private equity firms with a problem.

U.S. Private Equity Firms Left Holding The Baby As U.K. Mall Market Freezes Up
Pyramids Shopping Centre, Birkenhead

Private equity firms, primarily from the U.S., were big buyers of secondary and regional malls when banks and funds looked to offload assets as the U.K. market recovered between 2012 and 2016. These firms bought more than £3B of these malls during that period, according to Real Capital Analytics.

But now they cannot shift them, at least not at the price they were looking for. A combination of short-term factors like the effect of Brexit on U.K. retail and longer-term shifts in the retail sector have created a wariness among buyers toward all but the best shopping sectors, and a big gap between what buyers and sellers feel is the right price for centres.

Instead of selling, PE firms are refinancing and waiting for the market to improve, freezing the market. 

“A lot of malls were bought out of receivership by private equity firms as the market started to recover,” APAM founding shareholder William Powell said. “They’ve worked through the business plan and most wanted to sell, but they are struggling to find people to buy. They are refinancing and kicking the can down the road and putting off the decision of when they sell.”

Yields for secondary regional centres were around 8% to 9% in 2013, but fell to 6% to 7% as the market recovered. That cut value by 10% to 15% for buyers. Yields are rising to previous levels again, according to RCA

Powell said that even at elevated yields the potential buyers for these assets has narrowed dramatically.

U.S. Private Equity Firms Left Holding The Baby As U.K. Mall Market Freezes Up
APAM's William Powell

Prior to the financial crisis, domestic pension funds or private property companies would have bought these kind of centres. But the former have been put off by the complexity of the retail sector and the latter typically used more debt to fund purchase than is available in the current market. And both types of firms got burned buying shopping malls at the last peak — they are not about to make the same mistake twice. 

Only one name comes up as an active buyer of regional retail assets: Wirefox, a Northern Irish investment firm backed by Asian capital. In the second half of the year it has agreed to buy the CastleCourt shopping centre in Belfast and the Ocean Terminal shopping centre in Edinburgh for a combined £182M — a significant investment, but it is not going to support the market on its own.

Not everyone agrees that values have fallen, but private equity owners having to hold on for longer than expected is a common theme in the sector.

“It’s too early to say that values have fallen, but the volume of transactions is clearly down since Brexit and that is likely to continue through the rest of this year,” NewRiver Retail property director Allan Lockhart said.

“Some of the likely sellers are private equity firms, and their confidence about securing the prices they had underwritten previously isn’t there, and buyers aren’t willing to pay some of the aggressive prices that are being asked. It pushes their exit further down the road, but they are still receiving income, and they will still make a return, just maybe not the 20% they were looking for.”

U.S. Private Equity Firms Left Holding The Baby As U.K. Mall Market Freezes Up
Stretford, Greater Manchester

While the London office market has remained relatively robust in the face of Brexit, retail has had a tougher time. U.K. consumer spending has held up relatively well post-Brexit, but the British Retail Consortium warned this week that as the inflation hedges put in place by retailers before the referendum vote start to come to an end, the fall in sterling will cause shop prices to rise. Coupled with stagnant wage growth, this will make U.K. consumers feel poorer even if the country is not in recession.

On top of this cyclical issue are the secular trends that have caused an ever-increasing divergence between the best shopping centres and the rest, driven by the effects of e-commerce and changing shopping patterns. 

“The secondary regional shopping centre market is challenging and has been for a number of years,” Powell said. “If you’re in the wrong town or you own the wrong centre in town then you’re managing a declining income stream. You might have tenants that are on nine- [or] 10-year leases that might be expensive to buy out, but your centre is 50% vacant. There are only so many food outlets or cinemas you can put in. A lot of these centres will become development sites.”

Indeed, the owners of some malls in regional towns are already starting to knock down part of centres to convert to other uses.

Apollo is looking to demolish 50K SF of the 346K SF Stretford Mall near Manchester to create a residential development site.

LaSalle Investment Management is looking to demolish 13 units totalling 29K SF at the 610K SF Pyramids Shopping Centre in Birkenhead, Merseyside, to create a drive-thru restaurant and additional parking.

With the effects of Brexit continuing to unfold and the challenges for secondary regional retail a long-term trend that still has some way to play out, those firms holding on to these kind of assets better love them — they are going to be stuck with them for some time yet.