Invest in Out of Town

Does the sale of Stockton Shopping Park mark a watershed for the Out of Town investment market? Sold this month for £9.5 million reflecting a net initial yield of 9.4%. This scheme has a WAULT of 6.5 years and an average rent of £7.56 psf. More importantly, it is let to some of the “darlings” of the OOT retail sector, namely B&M, The Range and the Food Warehouse.

It is quite possible that we are now entering a unique period of opportunity in the out of town retail market. A time when the buyer’s pricing aspiration, the valuer’s pragmatism and the vendor’s need to reduce retail exposure are perfectly aligned. In a post COVID world where retail is often a dirty word, many OOT retailers have not only proved themselves to be robust but have outperformed.

We have known that the fundamentals of OOT retail should have longevity, both in terms of customer demands, but also investment performance, namely:

• They sit on large sites with ample car parking;
• Larger, relatively open plan stores allow for greater social distancing, whist allowing customers to browse;
• Deliveries can be controlled on a unit by unit basis, generally direct into the back of each store;
• Occupiers, in conjunction with landlords, can set up external click and collect posts;
• In the longer term, we are already seeing occupiers adapting their space or their method of retailing, to take advantage of the OOT store to complete the retail fulfilment model, e.g:

Next have set up a dedicated C&C area in their Lombardy Hayes store of c4,000 sq ft. Here, customers can enjoy a cup of coffee, in a pleasant environment, with the odd homeware item around them for impulsive purchases. We understand they may be handling some 1,000 parcels per day from this facility, pulling from an extensive catchment.

Tesco, with a view to doubling the size of their online capacity, have announced the opening of three urban fulfilment centres by the end of summer 2020 – the first in West Bromwich. Online retail penetration is now over 30% of the total retail cake, and the size of online grocery sales has risen from 7% this time last year, to over 13% by June 2020. The genie is out of the bottle. One would expect all of the big 4 supermarket operators to consider the most efficient use of their larger stores, not just for the short-term gain, but as a permanent fixture.

• OOT stores are generally simple buildings, which can be easily adapted. In many cases, they are double height stores, where mezzanines have not been utilised, either because the tenant doesn’t need/want them, or perhaps the planning regime has prevented it. Expect a more intensification of space where possible.
• For the tenant, occupational costs tend to be significantly lower than their shopping centre equivalent – lower rent, rates and especially service charge.
• For the landlord, it is still beholden upon them to create an interesting retailing environment, so expect to see more food and beverage (café pods, drive thru etc) and perhaps services associated with shopping centres and high streets e.g bookmakers, hairdressers etc.
• For the investor, stock picking will be key. The simple mantra should be:

1. 1.  Good credit from a smaller number of tenants, say 5 maximum;
   2. Invest in the “staples” of OOT retailing – Dunelm (market cap £2.76bn; B&M market cap £4.7bn and Pets at Home market cap £1.55bn). B&M revenue up 17% March 19 to March 20 and Pets revenue up 12% through lockdown;
   3. Even better, secure a food anchor, say M&S Simply Food, or better still, Lidl/Aldi;
   4. Lot size sub £20 million;
   5. “Affordable” /re-based rents, which probably means sub £20 psf in most locations;
   6. Accept shorter leases, say 5 years max;
   7. Less, or even no exposure to fashion retail;

• By the time September Quarter comes around, there will have been 6/12 months+ of value erosion on this product, perhaps not as drastic as the shopping centre equivalent, but nonetheless, rents and cap rates which better reflect market value. The sector is still dominated by UK Fund ownership, which will have written down their portfolio significantly in the past 6 months. They will still need to reduce their retail weighting, and OOT retail may be the most liquid of their retail assets.