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Published on: Deals

Why Are Retail Investments Not Cheaper?

Don’t buy retail investments.

As with any investment the risk is reflected in the price. As this is the business section I assume this does not require explanation. But what I can’t explain is why the huge risks of investing in the retail sector are not being reflected in the price.

Retail has always been perceived as a safe – every town has a high street and every high street is populated by national retailers. An investment occupied by a multiple retailer has been viewed as the lowest risk investment – the rent is secured against a tenant with hundreds of shops and so the income is considered “certain”.

Despite the reduction in lease length from 25 years down to 5 years, the profligacy of break clauses and the structural changes to the retail landscape that are inevitable from the move to online sales, prime retail yields remain between 5% and 6%.

I find it astonishing that yields have not moved out in the last 12 months. I am amazed that anyone would consider buying any retail investment right now. At any price.

The retail high street is changing. Up to now the pace has been glacial. We know the polar ice caps are melting, but we don’t really notice it until we see footage of a massive slab of ice falling into the sea. In the retail landscape, that slab of ice is the Company Voluntary Arrangements (CVA).

The misuse of a CVA allows a tenant to end or re-negotiate leases at will – unless the landlord would like an empty unit. The burden of business rates normally persuades a landlord to be pragmatic.

The most recent major CVA instigated by New Look demonstrates the misuse of CVA’s. To make their unit in Stratford East London viable, New Look sought a rent cut of 40%. The landlord, Frogmore, politely declined and arranged a letting to a new tenant. New Look then increased their rental bid to a level higher than they had previously been paying. So much for “viability”!

Regardless of whether CVA’s are used properly or not, they will have a significant impact on retail investment.

There will be more empty units. Supply will exceed demand. Rents will be lower for longer. Income will be less certain.

There are still very good properties in very good towns and very good retailers. These do present opportunities for savvy investors. One’s who know the risks and price accordingly.

But that risk is not accurately reflected in yields of 5% – 6%. Not in this climate. However, if you own retail investments and can get a price based on 6% – I would sell them – while you can.

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