There is no doubt the wave of bad news surrounding UK retail has had a major impact on the liquidity of real estate debt finance.
The sector is experiencing tough trading conditions, with recent high-profile bankruptcies including Toys R Us, as well as company voluntary agreements and administrations such as House of Fraser this summer.
Given the uncertainty in the sector, many retail property owners will struggle to refinance with their existing lenders. One non-bank lender Real Estate Capital spoke to this week pointed to an “awful lot” of potential retail financing opportunities crossing his desk at the moment.
According to specialist asset management firm APAM, there are around 200 shopping centres with an approximate value of £7 billion (€7.79 billion) where principal debt is maturing, most of which were purchased between 2012 and 2015. This hints that, as debt comes due on traditional shopping centre stock and high street retail, owners need to think creatively about how to refinance, given the trouble in the sector.
Banks are still financing retail, but they are becoming more cautious. According to the latest survey of the UK real estate debt market from consultancy firm Link Asset Services, published in March, 77 percent of respondents are making retail investment loans this year, which compares with 85 percent in 2017. Conditions in the UK retail market have deteriorated further since the survey was published.
For those lenders seeking higher risk/return strategies, however, the wall of retail maturities could lead to lending opportunities.
Lenders should look for schemes subject to clear asset management plans in locations which justify them, and owners with a track record of turning assets’ fortunes around. Retail with shorter-term leases, allowing the possibility of turning tenants quickly – in case they are not performing well – is another key aspect to be considered, one banker recently told us.
Calculating a scheme’s estimated retail value is increasingly difficult, given the occupational uncertainty in the sector. With yields increasing, steady income is crucial, meaning lenders should be wary of over-rented schemes and focus instead on those in which reviews have brought rents down to more sustainable levels.
A focus on occupiers is also important. Discount retailers, for instance, continue to perform and favour high-footfall locations. Lenders must be open to changes in the use of physical retail space: click and collect or retail displays can keep customers coming to stores, for example.
Retail in the UK is going through a tough period and it is fundamentally changing as a result of e-commerce. But it is too simplistic for lenders to conclude all shops and shopping centres’ days are numbered.
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