The ongoing Toys ‘R’ Us saga finally came to a head yesterday, closely followed by Maplin in the race to insolvency. New Look and a few other multiple retailers are also said to be closing in on closure.
We have been saying for years that extreme caution is needed when considering retail as an investment sector. We have not advised clients to buy any retail investments in the past 12 months and will hold to that advice unless something exceptional becomes available.
For us, something exceptional would have to meet the following criteria:
- Location – prime, nothing less. If your tenant does a “Woolworths” you want to know there is demand for the unit from alternative tenants. Empty units nearby are a bad sign.
- Size – lettable! Not very specific but how many Toys ‘R’ Us stores are going to re-let quickly?
- Tenant – financially strong with a solid balance sheet. Avoid any retailer owned by venture capitalists. They are ruthless.
- Use – really think about the future of the current tenant’s operation. Will it survive the structural change in retail? Stay ahead of the curve.
- Rent – at or below the current rental value. Avoid ANYTHING over-rented. Period.
- Lease – a straightforward FRI lease with no funnies (rental concessions/deeds of variation/schedules of condition etc.) Bear in mind if the tenant fails the lease is meaningless anyway.
- Price – well of course! But does the real return reflect the risks? It must – regardless of what anyone else wants to pay.
Anything that does not meet all of these criteria should be left well alone. Sub 6% yields do not reflect the real risks involved when investing in a sector that is undergoing significant structural change. A change that has seen retail footfall decline for ten consecutive months (Ipsos).
In most cases there is better value in the office and industrial sectors – which is where most of clients are headed. Still with very stringent criteria and thorough due diligence. Those opportunities that “tick the boxes” will show yields that more accurately reflect the real risks of the investment.