Who can remember back to before the financial crisis when retail property stood proud and tall? Go forward a decade and retail property values continue to decline under the weight of economic uncertainly and the relentless pressure from on-line retailers. Now is not a good time to be invested in retail property funds. Total negative returns are starting to be announced by some funds at levels as high as -10%. Values are declining with some indicators suggesting falls of circa 1.5% per month with worst to come in 2019.
Industrial body, RICS has taken the unusual step of issuing a valuation notification to its members warning of a structural change in the retail property sector. The body is concerned about the downward pressure on retail property values and is guiding its members to take more consideration of wider economic factors rather than leading with comparable transactions when providing valuations.
With the exception of food, on-line retailers continue to power forward grabbing market share from the high street. It seems like never a week goes by without news of a retail chain closing outlets or falling into administration. With internet sales at 20% of total retail sales in the UK and rising we can expect retailers to continue to fail right through 2019. If you are brave enough the Postings Shopping Centre in Fife has an auction reserve of just £1. The current owners are predicting considerable interest in the auction sale scheduled for 5th February with Allsops. It might be a publicity stunt to generate interest but the sale price is likely to be groundbreakingly low.
With all this bad news funding retail property acquisitions using senior debt is a monumental problem. As cash flow from retail units can no longer be relied upon lenders will often seek additional security to support their credit decisions. The Racefields Exchange is brand new so we have not yet seen any retail properties being offered as security for a loan. When we do I am fascinated to see if any lenders make a funding offer. We are not quite at BOGOF but of all the property sectors out there, retail is at the front of the queue on the discount check-out.
NOTE: This article is not be taken as financial advice. The opinions expressed within it are my own. If you are considering investments in retail property I strongly recommend that you first seek professional financial advice.