Welcome to The Crown Estate
Retail parks - the investor's perspective
15 October 2012
The Crown Estate's investment strategy for our £2 billion of retail holdings has been shaped by a market which has changed significantly for prime investors over the last few years.
The trends that had been evident for some time have accelerated as the economy has contracted and then flat lined and debt has become highly constrained. But, as mainly prime investors, what has defined the market for us over the last five years?
There has no doubt been a significant contraction in what we would consider institutionally investable stock. As retailers need fewer and fewer units to obtain nationwide coverage, so the number of schemes and locations that could genuinely be described as prime has correspondingly shrunk. For example, units in market towns that would have routinely been institutional stock up to the end of the 1990s are now simply not on this type of investor's radar. This is a good reason as to why we are committed to the prime retail park sector, in addition to our core London portfolio. Conversely, prime assets have remained pretty fully priced, apart from the convulsions of 2008/09, particularly given the underlying occupier markets.
There has been an end of widespread inflation matching or beating rental growth. In a no or low growth environment why should real estate, as a factor of production, produce more than six or seven per cent returns? In a similar vein, there are no successful, passive landlords anymore (if indeed there ever were). Landlords will sink or swim based on their ability to stay close to their customers, understand their businesses and work with them to create successful retail environments.
There is no going back. The challenge for the high street is to reinvent itself as it will continue to find it difficult to compete with the scale of major, purpose built centres with controlled environments. Without dramatic change the institutions will not return to investing there in any great quantity. However, whilst there are no doubt secondary schemes which are beyond saving, as the market continues to more accurately re-price risk, there is money to be made by astute investors in the non-prime markets who understand and can manage the specific risk they are taking on.
And perhaps most importantly; don't look beyond occupational supply and demand. Wherever we are, we like to be dominant in our catchment. This is critical and our strategy to invest in the retail park sector has partly been driven by our belief that planning-led undersupply in the sector will support rental growth for the best schemes over the medium to long-term.
Our strategy has also been shaped by the continued and robust demand for the best retail park assets, even throughout the downturn. This is demonstrated by the void rate on our wholly owned parks which is around one per cent, and, even in these tough times, a steady stream of new occupiers continue to break into the sector. It should also be noted that many of the big occupiers have generally retained a strong financial position - our top ten tenants are responsible for around two thirds of our rent role from our wholly owned parks and, by developing a portfolio of multiple schemes, we have been able to develop strategic relationships with retailers to the benefit of all parties.
The strong position many of our occupiers hold have helped us to achieve a healthy reliable income return. We have an average running return of around 5.75 per cent on our parks, which, for an income led business with a lot of very prime assets in low yielding sectors such as West End retail, rural and residential, is particularly welcome. It also offers us diversification of risk as well as providing some balance to our development activities in the West End.
More broadly, our expectation is that over the next five to ten years prime retail is likely to be a source of relatively stable and reliable, risk adjusted returns that compare very favourably with any of the domestic alternatives available to property investors, if you are prepared to look through short term market volatility. For that reason, we expect to remain committed and long term investors in the sector.
At present, we believe The Crown Estate has reached critical mass and, consequently, we are likely to be less active than we have been over the last couple of years. Our preference continues to be for larger dominant schemes in and around substantial urban areas and we also see a future for leisure as part of this element of our portfolio. With values having eased back during 2012 we may see opportunities to acquire an additional scheme, alternatively we remain interested in development funding which has the potential to offer a more attractive entry price to a scheme.