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NewRiver in the press

Estates Gazette: Value-Added Tactics

EG Banner    22 April 2017  
    Karl Tomusk, Finance Reporter   

    Quote from Nick Sewell
    Executive Director, NewRiver REIT


In recent years, it has been harder than it should be to turn a decent profit from a retail investment. The key to success, as ever, is to have a plan – and then to carry it out

An unusual deal closed in Ipswich this February – a deal that defied a trend plaguing retail landlords across the country. What made this transaction special was not an eight-figure sale or a low single-digit yield; what made it special was that it made money – a lot of money – after two years of asset management.

Adding value should not be news, but it is. When Capital & Regional sold Buttermarket Shopping Centre in February for £54.7m – more than five times the £9.2m it paid for the centre in 2015 – it became one of the few to take a secondary asset, add significant value to it and then sell it on.

According to EG Research data (see box, overleaf ), since 2010, five shopping centres have been bought and later sold for at least double the original price – while a quarter have lost value, despite asset management.

“Long gone are the days when you could just buy an asset, sit back and let the yield movement do all the hard work – and then sell for a profit,” says Graeme Clark, head of retail management at Savills. “That world has gone and I suspect it’s not coming back.”

Visionaries

The first rule of shopping centre management is that it needs an all-encompassing masterplan. Before buying Buttermarket, Capital & Regional established that Ipswich represented a tight catchment with little competition. Out-of-town leisure existed but there was little on offer in the town centre, which persuaded themto focus on leisure over retail.

James Ryman, investment director at Capital & Regional, says: “We wouldn’t go in with a hope that it would work. It would have to be well researched, we would have talked to operators and have confidence that what we are suggesting will fly. In Ipswich, it was always going to be a leisure-anchored scheme and

that wouldn’t change. The broad concepts were tested and set in stone before we wrote the cheque.”

He says the team turns down projects even if they could carry out a refurbishment. “Fundamentally, we’ll look at the asset: is it capable of some form of transformation in its physical context?

“But we’ll also look at the town it’s in. Is there appetite? Even if we can do the initiative, does the town warrant that sort of initiative in terms of what’s already there?”

Similarly, NewRiver REIT executive director Nick Sewell says that when the company was working on Regent Court in Leamington Spa, between 2012 and 2015, it became a case of setting out a plan and spending a year and a half getting the council “to buy into what we were trying to do”.

The shopping centre’s restaurants were attracting customers because the town as a whole was undersupplied, and so NewRiver initially brought in one restaurant at a time in order to convince the council it could carry out the full project. Eventually, the shopping centre, which NewRiver bought for £10.5m at an 8.9% yield in November 2012, was sold for £28.4m in January 2016 – a net initial yield of 5% (see box).

The fundamental mistake asset managers make with shopping centres is not having a broad vision for their sites, says John Prestwich, consultant at Montagu Evans. “There are very few landlords that are focused on the secondary marketplace who have a proper strategic vision in terms of turning around theshopping centres they own.”

This is part of the reason, Prestwich says, that councils have started buying up more shopping centres themselves.

Councils are able to incorporate retail and leisure into broader redevelopments that they have funding for and focus on what its residents need. In Stockport, for example, the local authority bought the Merseyway Shopping Centre last April as part of a £900m regeneration scheme, while Leatherhead bought the Swan Centre Occupancy 86% 100% that same month, calling it a “significant component of the draft masterplan for Leatherhead town centre”.

Into the void

While having no broad vision for a shopping centre leads to an almost certain downward spiral, it is not always the landlord’s fault. Rather than being able to carry out a fully formed plan, some landlords with failing shopping centres, Prestwich says, are “caught holding the baby”.

In centres with low occupancy, landlords will have to pay empty rates, insurance and the service charge allocation while receiving little rental income and making loan repayments.

As a result, there is little financial liquidity to carry out a wholesale redevelopment. Prestwich says: “They try to address it by way of short-term measures but ultimately that has been the sticking-plaster approach, which just has not succeeded, and the banks make their move.”

However, Clark says, short-term solutions such as moving in charity shops or community events can be useful, although they do need to be strategic and relevant to the customer base.

At Buchanan Galleries in Glasgow, for example, Clark’s team at Savills brought in a beach-themed play area, free of charge, to sponsor a local

children’s hospice. It stayed at the shopping centre for two months last year and was used to cover empty rates costs, bring in the target demographic – families – and have some impact on the community. “Even if they just cover the occupational costs of the unit, at least it keeps the lights on,” Clark says.

Brand appeal

For asset management to really work, that kind of visibility needs to extend to the tenants landlords are trying to woo – especially when there are heavy vacancies or a complete strategic rethink to deal with. Convincing new tenants to come into secondary shopping centres only works if you have a name with a strong track record.

When Peter Mace, head of central London retail at Cushman & Wakefield, and his team worked at Multrees Walk in Edinburgh in the early 2000s – turning it into one of the first luxury UK shopping  destinations outside London – he used “the domino effect” to get tenants in. He had to convince Harvey Nichols to come in as an anchor before others, such as Louis Vuitton and Burberry, followed suit.

He says: “I have dealt with this business for 30 years. If you’ve got a great track record of dealing with lots of these projects, then clients are going to listen to what you have to say – at least I hope they are.”

The same applies for Capital & Regional. In his team, Ryman says, they do all the asset management in-house as a way of building relationships with tenants, which gives them unrivalled access to strong retailers they can call on for their most ambitious ideas.

He says: “We come at it from a position of strength in that they know what we do. They trust that we know what we are doing as specialists in this field. So when we put forward a vision, it’s one that is well thought through and has been discussed.”

Sitting back and letting the yield work its magic might not spawn the next Buttermarket or Regent Court any more, but those looking for an opportunity will eventually find it. What it takes is a coherent plan – and a sturdy Rolodex.

22 April 2017
Estates Gazette, Karl Tomusk, Finance Reporter
Nick Sewell, Executive Director, NewRiver REIT