Pbb backs Korean investor’s first foray in UK retail warehouse

German bank provides £107m loan to Hana Financial Investments, supporting what is claimed to be the largest single asset purchase in the sector so far this year.

Pbb Deutsche Pfandbriefbank has financed Hana Financial Investments’ acquisition of Gallagher Retail Park in the West Midlands of England with a £107 million (€120 million) facility.

The loan backs the Korean institutional investor’s entry into the UK retail sector, in the latest example of Asian interest in the country.

Hana bought the park through a real estate fund managed by Korea Asset Investment Management for £175 million in July, in what the sellers, KKR and Quadrant Estates, claimed was the largest single asset acquisition in the UK retail warehouse sector so far this year. The deal price implies a loan-to-value ratio of 61 percent.

KKR and its specialist operating partner bought Gallagher Retail Park in 2014. The acquisition, made through the global investor’s Real Estate Opportunity fund in three phases, was valued at £123 million.

Following the acquisition, Quadrant amalgamated three retail units to create one shopping park and developed 33,000 square feet of new space, including four new restaurants. The work resulted in capital investment of around £17 million.

Before the repositioning, the asset yielded around 6.5 percent, compared with 5.2 percent today, a return that has attracted core capital from institutional investors, Christopher Daniel, founding partner at Quadrant Estates, told Real Estate Capital.

“Besides Hana, three other parties from Asia looked at this asset,” he said. “We also saw demand from the UK and European institutions.”

All units of the park, located off Junction 9 of the M6, are pre-let to retailers including M&S, JD Sports, Sofology and DFS at rents of up to £45 per square foot. This has resulted in an increased rent roll of circa £2 million per year.

“Gallagher is not over-rented. There’s opportunity to increase the rent for some of the units, with an increase of around 5 percent, based on existing evidence on the park,” Daniel said.

The Gallagher deal comes at a challenging time for retail in the UK. The sector is under pressure from the rise of e-commerce and weak consumer confidence, and 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 high-profile casualties this year.

Despite this, Daniel said there is “cautious demand” for retail investments, with core money chasing prime, cash-driven schemes.

“Strong demand for prime retail assets will actually get stronger, while there will be more demand for secondary neighbourhood convenient retailing,” Daniel noted. “Retail stuck in the middle will have a very difficult time: what the sector needs is fewer shops in better locations.”