'Bargains to be had' in retail property

Published on Saturday 4 July 2009 14:41

INVESTORS are being advised that this is a good time to "bottom-fish" for bargains in the commercial property market as recovery is expected to begin next year.

The 2009 Midsummer Retail Survey published by property consultant Colliers CRE is predicting that investment returns, which dropped dramatically last year, will continue to fall for the next few months. It predicts the market will pick up in 2010.

The UK retail sector has had a torrid time during the recession. Since January last year, 7,826 high street retailers have gone into administration, including 2,172 since the start of 2009. Birthdays card store chain and the Bay Trading fashion brand were among the most recent victims of the downturn. Investment returns for the in-town retail market fell by 12.2 per cent in the 12 months to May 2009, according to Colliers. Investors believe the bottom of the market is near and money is starting to flow in from equity-rich funds.

Dermit Smith, director of investment with Colliers, says: "Some of the institutional funds, such as API, LaSalle and Scottish Widows, recognise the potential for Scottish retail investment property and have been successfully bottom-fishing. Equity-rich funds are taking advantage of pricing in the prime market."

He gives the example of Legal & General buying two shops occupied by Waterstone's and Game on Princes Street in May for 10.4 million. Around the same time, Rutley Capital Partners bought a shop occupied by HMV on the street for 9.65m. According to Smith, investors are taking a low risk approach by going back to property basics. They are looking for prime sites with at least 10 to 15 years leases and strong covenants. However, overseas buyers have to date focused on the London market and not many have ventured north of the Border.

But the secondary retail market is likely to suffer from longer than the prime sector as prices are still volatile and there is a dearth of bank finance available. The problem is even more acute where leases have fewer than ten years left before they expire and there is a potential for properties to lie empty.

Smith expects Scotland to lag behind south-east England when it comes to recovery. He adds one issue is that Scotland may have too much retail property, especially around Glasgow.

He adds that the Government's asset protection scheme (APS) is a talking point among landlords and property consultants as they are unsure what its impact will be. APS was launched in March as an insurance scheme to help banks which have toxic debt on their books. Lloyds Banking Group and Royal Bank of Scotland have signed up to the scheme which sees the Government insure them against further losses. The aim is to kick-start their lending.

"Nobody really knows what the impact of the APS will be on the property market as the detail is a bit fudged. But it looks like it will be a good thing as the APS provides a comfort blanket to the banks taking part. It should mean that properties will come on to the market in a managed way, rather than dumped by the banks."