UK Shopping Centres Enter Age of Change

UK shopping centre property investments provided robust total returns of 10 percent in 2015, but according to MSCI Inc., the sector faces an age of change which will bring challenges for many

MSCI Inc.’s new study, MSCI/Colliers International UK Shopping Centres Investment Report, shows that £4.49 billion of assets changed hands in the sector during 2015, as both domestic and overseas investors targeted the sector.

UK shopping centres provided investors with a total return of 10 percent in 2015, falling from the 14 percent return the previous year, and still behind the broader UK property market, which returned 13 percent

James Findlater, Head of Shopping Centre Investment, Colliers International, commented:  “Strengthening values have been the dominant component of total returns through the recovery cycle but for many secondary centres, changes to retail dynamics, poor asset selection and inadequate capital expenditure allocations mean that investment yields have failed to keep pace with the decline in income leaving some investors out of the money.

“Even for top‐flight, prime, regionally‐dominant centres, the age of dramatic yield shift is coming to an end and the driver for returns will be entirely focused on income. For the UK shopping centre sector, the age of change is just beginning.”

The Report analyses a sample of 213 shopping centre assets valued at around £13.5 billion.

Colm Lauder, Vice President, MSCI, added: “Shopping centre prices tend to lag the general retail property market due to their significantly larger average lot sizes and the level of capital expenditure that they require.

“Nonetheless, following the broader retail trend towards better quality assets, prime shopping centre rents grew through 2015 with increasing retailer confidence, and yields subsequently compressed as investors’ demand for assets grew.”

The study shows that there was 0.2 percent rental growth in the sector as a whole during 2015, whereas prime rents grew by 1.4 percent.

James Findlater, Head of Shopping Centre Investment, Colliers International, said: “To meet the challenges of online retailing and reduced retailer demand for space, shopping centres have to be treated as organic and adaptable trading environments.

“The ability to generate progressive income is all‐important and in that context expect to see increasing polarisation between prime and secondary assets."