16 June 2014

Paul Clark: Retail park sector could soon open its door to overseas investors

The UK is one of the world’s most popular destinations for overseas blue-chip property investors, a position underpinned by its stable political environment, high levels of transparency and corporate governance, and the number of deep and liquid markets that are available to those with capital to deploy.

London has of course been at the front of the queue, attracting the largest share of global real estate investment in Europe.  Its attractiveness and global brand is grounded in its heritage, its position as a leading centre for finance and business, its comprehensive transport infrastructure, its rich cultural diversity and its reputation for world class leisure and retail. These factors have meant that both the occupier and capital markets for London real estate attract genuinely global demand.

London’s highly professionalised markets ensure investors that are new to the UK have ready access to partners and advisors that understand the  sector and boast the specialist skills to drive full value from an asset. Numerous incumbent domestic owners have critical mass and, as a consequence, are well placed to offer the kinds of large scale investment opportunities that global investors tend to seek. This also helps provide for deep strategic relationships with some of the world’s  leading occupiers, aiding the implementation of long-term management strategies.

Whilst overseas capital has fuelled the resilience and performance of London’s capital markets, the ability of other sectors of the UK real estate market to attract investment from overseas has been patchy.  However, as investors have become convinced that the worst of the downturn is behind us, appetite for regional UK property now sees it ranked second only to London as a European investment destination for global capital. Most notably we have seen capital flowing into regional shopping centres such as Sheffield’s Meadowhall and regional office schemes in Cardiff and Manchester.

As investors have widened their scope, one sector which has yet to see significant interest from abroad has been dominant out of town retail. For a long time now, resilient occupier demand for the best schemes, matched by a planning-led undersupply, has supported the outlook for prime out of town assets. However, whilst domestic investors have long been attracted by these dynamics, there have been a number of historic barriers to entry for their foreign counterparts, not least the unique nature of the UK’s planning system which underpins values. Similarly, individual schemes alone aren’t, for the most part, of sufficient scale to appeal to large blue chip investors and aggregating parks into a substantial portfolio requires specialist market knowledge.

We believe that these barriers are no longer insurmountable. A select number of domestic retail park players with critical mass and specialist skills in the sector now offer opportunities of a scale required by blue-chip overseas investors, together with the benefit of strategic occupier relationships. These top UK retail park owners, among which The Crown Estate is now the fifth largest, have an in depth understanding of the market and the skills required to navigate the planning system.

This means that they are able to deliver significant asset management initiatives to drive long term value, whether that’s increasing floor-space, improving public realm, or introducing new use classes to enhance the customer experience. The best managers are also starting to think about how they can adopt a more progressive approach, ensuring parks deliver across a multitude of platforms, both physical and online, as well as the impact they have on the environment and the contribution they make to local communities. Having grown our funds under management to approaching £900m through joint ventures with major domestic and overseas investors, we, like others in the market, know the value investors place on partners with a clear long term vision and the skills to realise an asset’s full potential.

Overseas investors are by no means a homogenous group, so predicting how and when they are likely to break into a new sector is extremely challenging. However, our experience suggests that dominant out of town retail is currently displaying all the characteristics of a market that could well be ready to open its doors to international investors for the first time.

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