How to capitalise on a high-yielding high street and not get burnt

With many national retailers continuing to retreat from UK high streets ushering in a new era of shorter leases and the rise of more community-focused operators, this occupier shake-up is now rippling across into the investment market. Yields have shot up creating a sector ripe with opportunities – but only for those who know what to look for, and perhaps most importantly, what’s best avoided.

As property owners and potential investors grapple with the true value created by these shorter lease agreements – which in some cases have reduced to as little as three-years – the traditional means of valuing high street retail assets based on their reliable income streams is no longer relevant. This means yields for prime deals in the best cities, where assets are now over-rented, have reached 9-10%, figures that many of us have not seen for two decades.

And competition for these high yields is strong, as risk brings with it reward. As institutional money seeks to move away from high street retail due to the increasing demand for rigorous asset management which no longer suits their investment model, these funds are finding new buyers in the prop cos and international private family offices, with a particular emphasis on Israeli and Hong Kong money.

Examples of the deals to be had include the recent sale of a store on Reading’s Broad Street that is let to WH Smiths with seven-years of income. The property sold for £4.8m last year, representing a yield of 10.5% but offers the opportunity for alternative uses such as offices or student accommodation on the upper floors. It was previously acquired for £8.27m and a yield of 6% in 2013.

Other towns that have witnessed transactions reflecting these levels include historically attractive towns like York. Here the sale of a parade of unit shops at 3-7 Coney Street sold for approximately £4.4m, reflecting a net initial yield of 11%. The property is let to JD Sports, Lush, Mango and a vacant unit offering some addition asset management angles.

But to be able to fully capitalise on these opportunities it is essential to get the right advice. In a rapidly evolving market where investors are chasing yields, but asset management demands are high, it would be foolhardy to enter any potential deal without precise knowledge of the occupier landscape, local market, and what represents good value.

Before buying it’s vital to have:

A clear understanding of, and relationship with, key high street retailers – this is now more important than ever. To benefit from the high-yielding investment you need to know you are buying into agreements with retail tenants that will continue to want a presence on the high street and what that presence will look like.
An appreciation for how the pitch and the town’s wider retail offer work. This includes knowledge of any potential new developments that could be in the pipeline, and whether the pitch has the potential to soak up new tenants should you need to attract them. Does the unit’s physical layout also suit future potential occupiers’ needs as the world of retailing rapidly shifts to keep up with evolving consumer demands?
An understanding about whether alternative uses could realistically be explored with the space and sustained in that local market. With values having come down so much, investors are now able to look at buildings on a square-foot basis, enabling value to be created from larger sites which can be converted into alternative uses.
Knowledge of what retailers can afford to pay in the local market and are already willing to pay in that town.
Ultimately, with high yields tempting new investment, there is a risk that some new investors could get their fingers burnt if they haven’t got to grips with the fundamentals of the occupancy market and the wider town dynamics.

Right now, we are witnessing a sweet spot in the investment market – yields will start to come in again as people get comfortable that it’s not all about lease length and that there are other fundamentals to consider that will help to justify the yield. We predict that for high street assets they will edge back down to 5.75-6% over the next 1-2 years.

Afterall, there will always be a place for physical shops. High streets are not disappearing, and if anything, the Covid pandemic has pushed people to shop more locally and return to their most convenient high streets.

If you act now as an early entrant into this unprecedented market, you will certainly be rewarded if you take the right advice and fully understand the context of your investment in the round – both in terms of the occupancy market and the local catchment.

Get in touch with us today to discuss your high street investment strategy.