It is not quite business as usual for UK retailers. The sector is under pressure from the rise of e-commerce and weak consumer confidence, sparking concern among investors and lenders.
At Savills’ Financing Property presentation in London this week, valuation director Nick Hume recounted one lender’s warning of “enormous complacency” in the lending community about parts of the retail market. Property market risks, Hume continued, include retailers’ increasing tendency to use company voluntary arrangements (CVAs) to get out of trouble.
There are not many deals in the retail market, with even M&A activity falling away. A club of banks was forced to shelve plans to provide a £1.5 billion (€1.7 billion) unsecured revolving credit facility to UK retail REIT Hammerson to back its purchase of Intu Properties when the planned buy-out fell through in April, for instance.
Hammerson blamed deteriorating equity market sentiment towards the UK retail market since the start of 2018, on the back of a series of administrations and store closures. Retailers such as Toys R Us, the UK arm of which went into administration in February, and Homebase, sold to a restructuring firm in May for £1, are among the most high-profile casualties so far this year.
The risks of retail are not always being overlooked. Investment in retail property fell 47 percent to £1.4 billion in the first quarter of 2018, compared with the same quarter in 2017, according to Cushman & Wakefield data. Lenders, for their part, have increased loan pricing to reflect the risk premium. Still, the upward pressure on margins varies widely, depending on the location and strength of the scheme, with increases ranging up to 500 basis points, a real estate debt specialist based in the UK notes.
Lenders are scrutinising their exposure to UK retail, with conservative senior debt providers currently shying away from all but the most dominant centres. Others, however, may be attracted by the prospect of higher returns if they are prepared to back an asset manager they trust to stabilise an ailing scheme.
For less dominant schemes in poorer locations, attracting debt liquidity will be more difficult. Where finance is available, margins will reflect that risk, with covenants structured to enable swift action to be taken if the loan deteriorates.
Retail is not dead, just transforming. Lenders, therefore, should adjust their strategies to capture opportunities in a changing sector. While e-commerce has raised questions over the future of shopping malls, there is a rising demand for warehouses and distribution centres close to cities to support the growth of online retailing.
The picture is not uniform across Europe. Poland, for instance, is proving an attractive retail market against a backdrop of rising consumer spending. The €635 million debt facility provided by HSBC last January to fund the acquisition of a €1 billion Polish real estate portfolio shows banks can still capture opportunities in the retail sector by diversifying geographically.
Continental Europe also produces some core retail financing opportunities. A clear example is Allianz Real Estate’s €300 million loan with a 15-year maturity, provided in April to support BVK’s acquisition of the building that will house Apple’s flagship store on the Champs-Elysées in Paris. The rare deal combines a top location, one of the world’s most valuable brands as tenant and a well-respected sponsor. Allianz outbid competitors by offering long-term finance. Still, the German insurer provided conservative finance at a 50 percent loan-to-value ratio.
Although there are pockets of prime retail lenders will compete for, debt providers should adjust their attitudes to the wider sector. Lenders should be wary of providing finance to schemes without a clear future, given the structural shift reshaping shopping patterns.
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