30 May 2012

Commercial property investment – the case for retail warehousing

Warehouse Investment

Retail warehousing performance

A recent research paper by Capital Economics has attempted to explain investors’ relative confidence in the retail warehouse sector. Over the past five years, the retail warehouse sector has seen almost uninterrupted rental growth. Indeed, retail warehouse rental values fell in just two quarters in mid-2009.

While the 2008-09 recession hit rental values in all secondary, High Street, retail markets to a broadly comparable degree, over the past 18 months retail warehouse rents have outperformed. Since mid-2010, secondary shop and shopping centre rents have fallen by 6% to 7%. By contrast, secondary retail warehouse rents have been stable.

The restricted supply of new retail warehouse developments has helped to drive outperformance by retail warehouses. The constraints of the planning system act as a more significant brake on retail warehouse supply than for other types of retail space. When allied to the strong demand from retailers to operate from large format retail warehouses with ample free car parking for customers, there is understandable pressure on retail warehouse rents.

According to CBRE research, UK property had a robust finish to 2011 with total returns of the year of 7.6%. There has been a slight deterioration in performance at the start of 2012, with total returns of just 0.3% in January. However, the retail warehouse sector was the top-performing sector in January, with capital values flat but total returns of 0.5% driven by income.

Limited opportunity for investment

Custodian Capital, which is part of the Mattioli Woods plc group of companies, has a nationwide portfolio of syndicated property investments, acquired over the last nine years, of £110 million, comprising 60 assets with over 1,000 individual investors.

Across the whole Custodian Capital syndicated property portfolio, there is currently no retail warehousing apart from a commercial property in Macclesfield. This is in no small part due to the very limited opportunity to buy retail warehouse investments of less than £5 million. In addition there have been very few retail warehouses brought to the market, as owners have held them due to their strong income and total returns.

To have a fully diversified portfolio of syndicate holdings, clients should have some exposure to this very stable sector. Rental growth has been supported by both retailer demand and restricted supply over many years, and the underlying drivers of future rental performance are unchanged.

The Macclesfield retail warehouse opportunity

The property is located immediately off the town centre ring road, in a prominent position, adjacent to B&Q, Halfords and Topps Tiles and would be considered the best retail warehouse location in the town. There are three DIY stores and three retail warehouse locations in the town: Wickes which is located to the north of the town adjacent to Comet, just off the A523 dual carriageway; Homebase which is located on a secondary park (including Harveys, Currys, Pets at Home and Carpetright) to the south of the town, with no main road visibility and one vacant unit, and B&Q which holds a town centre position opposite Dreams and Tile Giant. There is not an over supply of retail warehousing in the town, given its catchment population.

This property fits very well into the syndicated property strategy. It offers:

  • Two excellent tenants
  • 9 and 10 years contractual income
  • Annual rental growth on the Dreams unit, in line with RPI
  • Strong location
  • Affluent town
  • Diversification of location, property type and tenant
  • Long-term stable performance characteristics of retail warehousing
Why Macclesfield?

Macclesfield is located in an affluent belt of Cheshire to the south of Manchester, close to Alderley Edge and Wilmslow, immediately to the west of the Peak District National Park.

This is a popular residential location with executive commuters to Manchester and provides the principal retail destination for the urban population of the town of 150,000 and over 475,000, within a 20-minute drive time of the town centre.

The town is well connected by road to its local area and by rail to Manchester Piccadilly and London Euston with an estimated journey time of 22 minutes and 1 hour 49 minutes respectively.

Custodian Capital target high value areas of the country, such as this to source syndicated property opportunities. They provide strong residual values i.e. where the value of the property with vacant possession is higher. In the case of this property, there would be strong interest from other retailers if either of the units became vacant.

The current £90 million town centre extension, proposed by Wilson Bowden, will, subject to planning, see the focus of the town centre move towards Dreams and Tile Giant, with a Debenhams department store anchoring the extension plans only 50 metres away. This will further strengthen this location as the premier retail warehouse location in the town.

For more detailed information on the Macclesfield retail warehousing opportunity, click here