At this year’s 26,800-strong MIPIM conference in Cannes, many familiar sentiments could be heard during the various meetings and events attended by PERE: how people are buying quality assets and avoiding too much risk, how they are focusing on asset management and the tenant experience and how they are favouring logistics and residential as long-term strategies.
What was different about this year’s conference chatter, however, was multiple delegates telling PERE more about potential distressed opportunities on the horizon, particularly in retail. One manager said this distress could mark the first time in a long time that his firm would be pursuing investments in areas that it had been avoiding, including both retail and offices. Another suggested that after a long real estate recovery, “something’s got to give.”
The latter manager said “the retail train wreck” is slowly unfolding and coming to the fore, with the UK the epicentre of the sector’s challenges and issues. The average UK high-street retail vacancy currently stands at 13 percent, while retail park vacancy increased from 8.2 percent at the end of 2017 to 11.2 percent at the end of 2018, according to UBS-AM Real Estate & Private Markets’ latest Real Estate Summary report.
Some distressed signals can be seen already, with reports this week that Lone Star Funds has handed back the keys on some UK shopping centers, while Orion Capital Managers has amassed a significant stake in troubled UK shopping centre owner Intu. Intu was subject to takeover talks by rival retail property company Hammerson last year before the latter walked away.
The current bid-ask spread between buyers and sellers in UK retail remains wide, averaging around 7 percent, according to MSCI. However, the expectation is that some distressed sellers may be forced to offload properties at prices that would clear the market. For one fund manager, this would be when “the dam breaks in,” when other sellers that had been hoping for better pricing finally would decide to sell. This type of distressed selling could occur in as soon as a year in the UK, the manager said, while a rival firm believed distressed retail opportunities were already emerging now.
Where will these distressed assets come from? Possible sources would include owners that had bought retail properties at what they thought were cheap prices and then leveraged up those assets or UK open-ended retail funds that are getting a lot of redemptions, for instance.
The opportunities are not just limited to the equity side of the market, and in fact may be emerging more quickly in debt. One manager said there is a growing need for retail lending as the sector has been “red-lined” by traditional bank lenders, underlying recent findings by Real Estate Capital.
Of course, not every investor was convinced that retail distress was an interesting opportunity. One manager asserted that at least some distressed deal flow would come from banks, but such institutions are unwilling to write off assets that are still generating rental income. That would leave distress to come from only the weakest retail properties, he reasoned.
Whether on the debt or equity side of retail, those interested in pursuing distressed investments will need to proceed carefully. One manager called retail “the biggest danger” in private real estate investing, especially when one considers that the sector represents a large percentage of many property indexes, including 23 percent of the NCREIF Property Index as of year-end 2018.
But that is, arguably, why it is also so interesting. Like so much on the cusp of change, the type of disruption that retail is undergoing, creates threats yes, but opportunities as well.
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