The almost total disruption of physical shopping environments has accelerated trends that were already underway. In the case of High Street shops - while yields had been on the drift for some time – the Lockdown brought a sudden shift which has crystallised a growing feeling that values had not reached appropriate levels.
In just a few weeks we’ve seen many High Street yields move out by 200 basis points or more. This is a trend which has not just been witnessed in secondary locations but even in some of the UK’s most desirable towns and cities. In many of these locations where prime yields had achieved up to 4.25% previously, assets are now being offered or transacting at yields of 7% or softer. Examples of where this has been witnessed include Guildford, York, Winchester, Leeds, Kingston, Richmond and Nottingham.
In terms of High Street valuations, the pandemic has abruptly shifted the market to where many investors felt that it should be. Any arguments to the contrary seem to have been superseded by recent events.
Of course, the question now is whether this is an over-correction? Can it really be right that you can buy assets in prime locations with five years-plus of income let to some of the most recognisable brands including Holland & Barrett, JD Sports and Specsavers at an initial return of 8%+? Clearly the quantum of rent being paid is the other crucial factor to consider for investors who are brave enough to take comfort that any current or any future retailer could afford to pay a similar level.
This would certainly seem to represent value compared with other asset classes – especially when interest rates look like they’ll continue to stay low and the gilt and equities markets are respectively characterised by low returns and volatility. Even if you factor in the growth of online retail and the converts it will have made during the Lockdown, there is still clearly a place for physical shopping space.
Paradoxically, the High Street - which had become the ‘poster child’ for the problems of the retail sector - could be about to become one of the best value buys in the property market.
Or as Warren Buffett recommended: “Act greedy when others are fearful”.
Director, Retail Capital Markets