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Lenders risk being too quick to veto retail

While debt providers are right to be highly cautious of the troubled sector, there are compelling financing deals to be found amid the gloom.

The covid-19-induced recession could not have come at a worse time for Europe’s embattled retail sector.

Physical retail has long been losing its battle with online sales but covid-19-induced lockdowns have brought new pain. Consultancy Savills recorded retail rent collection of just 13.4 percent in June in the UK, while the collapse into administration of UK landlord Intu Properties further dented confidence in the sector.

Although retail spending in the eurozone has rebounded since lockdowns eased, a downturn is expected to depress consumer spending in the long term.

It is, therefore, unsurprising lenders are not sticking their hands up when it comes to financing retail properties. Sources tell us many lenders blanket decline new opportunities in the sector, citing their existing exposure as among the main reasons.

But while most are sympathetic to lenders’ reticence, there are those in the market who argue lenders are being overly cautious. One debt advisor this month expressed the view lenders are being too negative by automatically vetoing retail deals, even centrally located shopping centres at 30 percent leverage “just because it is retail”.

A highly defensive approach is warranted, with more retailers likely to collapse and values to remain under pressure. But it is also true that retail property is a wide and varied sector, and some parts are performing better than others. Essential retail, such as supermarkets and convenience shops, have weathered the crisis. There are well-located shopping centres out there too with reliable, long-leased tenants. These do not deserve to be tarnished by the overall performance of the retail sector.

Supermarkets have remained popular with equity investors. Data provider Real Capital Analytics reported that sales of European grocery stores outstripped the rest of the retail sector combined in Q2. Meanwhile, Wells Fargo announced last week it had granted a £60 million (€65 million) revolving credit facility to UK-based Supermarket Income REIT in what the US bank described as a “defensive lending decision”, following the borrower’s 100 percent rent collection in June.

Retail parks are also considered more resilient than city centre shopping. Savills data show while shopping centre yields widened by 40 basis points in the past two years, prime retail parks moved out by just 10 bps. As well as often benefitting from featuring supermarkets, their characteristics also bode well for social distancing and open-air shopping.

There is also evidence of lenders willing to underwrite retail within mixed-use assets. In June, Berlin Hyp announced the €63 million financing of ‘de Kameleon’ in Amsterdam, which features 100,000 sq m of retail, alongside 222 residential units.

Geography is another factor in retail performance. While UK retail transactions dropped by a third in H1 2020, RCA data show retail investment increased by 37 percent and 47 percent year-on-year in Germany and Denmark, respectively.

A reshaping of the retail sector was underway before covid-19. It will be accelerated by the pandemic. One investment market source expects some investors to see opportunity in repriced retail and to target assets that come to market, either through forced sales or as owner-occupiers seek to raise capital. Although lots of stock will have issues, sponsors with well-considered business plans for assets could present interesting opportunities for debt providers.

There will also be a need for refinancing within the core shopping centre space where incumbent lenders are not willing to provide fresh capital. While there are plenty of falling knives in this segment of retail property, there are also centrally located schemes owned by experienced and well-capitalised landlords that will need new debt.

The relative lack of competition means lenders can provide loans on defensive terms, with lower loan-to-value and higher margins than pre-covid-19. Of course, terms are only defensive if the lender is comfortable with the underlying real estate.

With fears growing of the impact of further spikes of covid-19 across Europe and lockdown measures re-emerging, the future of retail remains uncertain and lenders are right to be wary. But let us not go so far as to label the sector a uniformly bad bet.

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