What The Data Really Tells Us About Where Retail Values Are Now
Among all the noise surrounding store closures and the advances of online retail, it can be hard to answer the question: What is retail property actually worth today?
So Bisnow looked at some of the sources of data available to those working in or looking to buy into the retail sector in the U.K., from various indices, to listed company share price discounts, to the coalface that is the property auctions market.
The picture was confusing, with some data providing a more rosy picture than might be expected, while other metrics were far more gloomy. Here is what the various numbers say.
The value of high street shops has fallen by around 10% so far in 2018, according to the CBRE Monthly Index of property values, as reported by The Times earlier this month. In the same period the index shows shopping centre values have fallen by 7%, and fell by 1.2% in October alone.
However, on average U.K. retail values have gone up by about 1.7% in 2018, according to Real Capital Analytics’ retail price index. The reason for the potential difference? CBRE’s index measures the value of assets compared with other similar properties, while RCA’s takes the value at which properties are actually sold and uses a repeat-sales regression methodology, calculating changes in the sales price of the same piece of real estate over specific periods of time. RCA pointed out that it is only better quality assets that are trading in the market right now, and that values are still 20% lower than in 2007, whereas values in most other asset classes have surpassed this peak.
At the coalface — auctions
Commercial property auctions have always been seen as an instant insight into property valuations: While valuers might use lagging data, auctions show what someone is willing to put her hand up and pay right now. And the evidence from the auction room paints a far more robust picture of the value of high street retail than that provided by the CBRE index.
High street retail unit values in London have remained pretty much flat, according to the MSCI/Acuitus Commercial Property Auction Data Report for auctions this year to the end of July. Values outside of London fell by 3%, with non-London rents falling by 1.7%. But overall, average retail yields fell between May and June, from 8.3% to 8.1%, as a slight weakening in values for the worst quality assets was offset by the value of assets with long income increasing.
However, when it comes to secondary shopping centres, auctions paint a very bleak picture of how values might have much further to go. As reported by Bisnow, the Callendar Square shopping centre in Falkirk was sold by Acuitus for £1M earlier this year, a 62% yield. Acuitus also sold the Abbeygate Centre in Nuneaton for £4.3M, an 18% yield. Both had fallen in value by more than 75% since 2005.
Visibility — the sales achieved by listed companies
In terms of visibility into the price of assets actually being sold and how they compare to book values, the best place to look is the listed sector. This exercise shows the variety of sentiment within the retail sector today. Last week St. Modwen sold the Edmonton Green shopping centre in North London to Crosstree for £72M, a 3% premium to its book value. The sale follows on the back of smaller retail assets in Liverpool and Cannock being sold for a combined 6% premium to book value, showing that prices are holding up for some assets outside of London.
On the other hand, Hammerson sold a 50% stake in the Highcross shopping centre in Leicester to a Japanese investor for £236M at the start of the year in a deal which represented a 5% discount to its book value. In July it sold two retail parks in Kircaldy and Bristol for £164M, 10% below their combined book values, highlighting the difficulty in the big-box retail sector.
Listed company discounts — where things are heading
All of these metrics look to establish the value of an asset today. The price at which shares in listed companies trade is seen as an indicator of where things might be heading over the next six months or so. And the share prices of the U.K.’s retail specialists paint a much less rosy picture.
There are four main listed specialist retail companies, and of them NewRiver Retail has the narrowest discount to NAV at 20%, with its focus on convenience-led shopping seen as more resilient than fashion-led shopping centres. Capital & Regional is something of a blend of traditional shopping centre and convenience-led retail, and it trades at a 38% discount to NAV. Among the shopping centre giants, Intu trades at a 39% discount, and Hammerson a 46% discount. Of course, share prices do not always accurately predict where share values go, but the current prices indicate big falls to come.
Takeover bids as a floor on prices
Intu’s share price is around 14% below the 215p a share Brookfield, Peel Group and Olayan offered to buy the company for, which valued Intu at £2.9B. That would imply its net assets are worth 28% below their current valuation. If we take it that Brookfield is a good arbiter of real estate values, could that provide a floor for shopping centre values?