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Why a strong business plan convinced Tristan to write its first UK retail park loan

Dan Pottorff, the manager’s head of debt investment, says Invesco’s determination to make the Birmingham asset more valuable over time was key to its decision to fund the project.

To avoid obsolescence or simply to ensure properties thrive as the real estate market emerges from the covid crisis, sponsors are coming up with new business plans for their assets.

For Tristan Capital Partners’ head of debt investment, Dan Pottorff, whether it is a refurbishment or a complete repositioning of an asset, a crucial consideration when deciding whether to fund any value-add project is that the property is “subject to a convincing business plan”.

According to Pottorff, this was the main reason behind the London-based manager’s decision to provide a £44 million (€52 million) loan – through its TIPS 1 income plus real estate debt fund – for Invesco Real Estate’s acquisition of The Fort Shopping Park in Birmingham, UK. Pottorff said Invesco’s determination to improve the asset’s value over time, through a business plan “that responds to changes in retail consumer spending”, was appealing.

Plans for the asset include operational changes such as smaller units being repurposed for food and leisure operators, as well as an optimisation of the tenant mix. “Typically, retail warehouse assets perform well when they have a diverse mix of tenants, so we got comfortable with Invesco’s business plan,” he told Real Estate Capital. “They are focused on bringing different types of tenants which will in turn diversify the kind of customers that are coming to the site.”

Aside from its imminent plans for the asset, Pottorff said Tristan’s appetite for the project was further boosted by the sponsor’s ideas around the possibility of changing the property use “if plan A did not work”.

Alternative uses, he continued, could include urban logistics and click-and-collect retail formats. “They have thought of a plan B – what to do with the asset if plan A goes wrong. We did a lot of analysis and due diligence on potential alternative use which supported an industrial or distribution use if need be. This gave us confidence in terms of our loan basis.”

He added: “As with any asset it’s important that it has flexible use because, as a lender, you do not get the upside of a successful plan A, so you need to think through a plan B or C.”

According to Pottorff, although Tristan always considers the potential change of use any asset could go through, this factor becomes particularly relevant when funding a retail project. He said: “Since there has been high volatility in the retail market, the underwriting of a potential repositioning becomes even more relevant.”

In the UK, many have identified out-of-town retail parks as post-pandemic winners, citing e-commerce as a reason for its prospects. Tristan is among those with positive views on the retail subsector but, according to Pottorff, its decision to finance Invesco’s scheme was not led by the sector’s positive story. “Our debt strategy is sector-agnostic,” he said. “We have a more positive view on retail parks than on shopping centres in the UK at the moment. But we would still do the same fundamental analysis in every retail opportunity that comes forward.”

UK retail parks are perceived by most lenders as easier to underwrite than other types of retail including shopping centres. For Pottorff, this is due to such assets’ lower operational costs and more stable rents.

“The lower operational cost of retail warehouse assets compared to shopping centres make it easier for lenders to underwrite. You are more comfortable underwriting retail parks’ rental levels and sponsors’ ability to achieve lettings. Although overall it is about comfort level, you also have to think on how much cashflow you might be able to use to amortise your loan and, clearly, with more cash efficient assets, there is more cashflow available.”

Tristan was also attracted to The Fort because it believes the asset meets demand specific to its location, said Pottorff. The 301,070-square-foot park sits on the outskirts of Birmingham and is located close to the M6 motorway, benefitting from a population of over half a million within a 20-minute radius. The site is anchored by retail groups including Primark, Next, JD Sports and Boots.

“The Fort has benefited from a strong rebound in footfall and renewed leasing activity since the easing of the restrictions,” said Pottorff. “During the pandemic, it managed to remain almost fully occupied with tenants paying their rents.”