US private equity is sizing up retail parks

Investors should expect some of their managers to make big bets in the UK property sector this year

It was just a month ago that PERE wrote about managers anticipating oncoming distressed opportunities in retail, with the UK at the epicenter of the sector’s challenges. Activity in the space has intensified in just the past few weeks.

In fact, investors in real estate funds sponsored by US opportunistic managers should not be surprised if those managers soon get stuck into portfolios of UK retail parks.

“Suddenly, private equity came in swinging in the past three months,” one broker told us this week. He added how he has met with eight US managers in the last two months, several of which have made bids on retail parks in the last fortnight.

Initial interest from private equity was prompted in part by London-based retail real estate investment trust Hammerson’s decision to sell off its retail parks – and the potential scale of the buying opportunity. The company sold nine such assets for a total of £564 million ($733 million; €652 million) from 2016-18 and has 13 remaining properties worth an aggregate £900 million in its portfolio, according to its 2018 full-year results. Indeed, PERE understands that US managers are looking at retail park portfolios that are £100 million and above.

Hammerson is just the start, as approximately a dozen other retail REITs and UK funds are also seeking to shed their retail warehouses, according to the broker. With the latter group, disposition activity is intended to reduce their weighting in the sector, given their investors’ concerns about the health of retail. The MSCI UK Annual Property Index had a nearly 36 percent retail weighting at year-end 2018, but UK property funds are understood to be aiming to reduce that allocation to closer to 25 percent.

What has made retail warehouses attractive to private real estate managers more recently, however, is the substantial repricing in the sector, as prime yields for such properties have softened by 100 basis points over the last 12 months alone, according to Savills.

While investors are understandably nervous about retail, they can take comfort in the fact returns from the retail warehouse sector still look more attractive relative to other retail segments, industrial and office markets in the UK, according to rival broker BNP Paribas’ latest UK retail report. For example, in Q4 2018, prime yields for retail parks were 5.50-6 percent, compared with 5.25 percent for shopping centers and 4.5 percent for high street, the report showed. Meanwhile, prime logistics yields were at 4 percent and prime office in London at 3.5-4 percent during the quarter, according to BNP Paribas.

One reason for this may be retail warehousing’s resilience against online shopping, as the type of goods sold in retail parks are generally more defensive against the rise of e-commerce. For example, online penetration for books and clothing are expected to reach 70 percent and 34 percent, respectively, by 2022, but just 18 percent and 21 percent, respectively, for homewares and furniture, according to GlobalData Retail. Moreover, retail parks may actually benefit from e-commerce, because such properties, with ample amount of parking spaces, are common sites for physical pickups for online purchases.

For now, we are hearing more noise than seeing action. While US managers have been making offers, they have yet to pick up UK retail park portfolios – there is still a 5 percent bid-offer spread, according to the broker. What is likely to get the ball rolling are Hammerson’s remaining retail parks, which stand a very strong chance of being sold to a US buyer.

UK retail parks have remained below the radar for many non-domestic buyers. But with the recent flurry of activity by American dollars around retail warehouses, that could well change soon.

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