“Foreign private equity buying up retail parks” – The Sunday Business Post, 12 April 2015

Foreign private equity buying up retail parks
The Sunday Business Post
12 April 2015

“Transactions worth almost €900 million have been completed over the last two years, writes Sean O’Neill

With consumer confidence returning and retail sales on the rise, one of the most active areas of the commercial property investment market over the past 18 months has been the shopping centre and retail parks sector.
At TWM, we estimate that retail parks and shopping centres to the value of almost €900 million have transacted over the last two years. This predominantly comprised nine portfolio transactions.
Just over 90 per cent of the number of assets in these portfolio transactions were located outside Dublin, which is a positive indication for investor sentiment for the regions. The expectation for 2015 is that the volume will continue to increase with the jewel in the crown, Dundrum, likely to be sold this year.
This market sector has changed quite a lot since the sale of Edward Square in Galway in 2013. This was the first centre to trade since the property crash. It was bought by Signature Capital at a price of around €27 million. Since then most sales have tended to be portfolios or “collections” of assets, which is in response to investor demand for scale.
Examples of these sales include Project ARC, which had a predominantly retail slant comprising retail parks in Naas, Limerick and Tallaght and was bought by Green Reit in Q3 2013. Other portfolios which traded during 2014 were the Acorn Portfolio comprising three centres in Cork, Clonmel and Balbriggan and acquired by Varde for €171.4 million and the Spectrum Portfolio, seven assets in Dundalk, Sligo, Cork and Dublin, bought by Varde for €135 million.
IPUT and Marathon bought the €158 million Parks Portfolio, comprising five retail parks in Dublin, Clonmel, Drogheda, Carlow and Mullingar. The Capital Collection was mainly retail investments in Dublin with a quoting price of €123 million and these assets sold individually, indicating there was no premium for the entire.
The Harvest Portfolio was sold by Nama to Davy’s for a reported price of €40 million and this portfolio comprised five smaller regional shopping centres.
The most recent portfolio sale is the Cornerstone Portfolio, brought to the market this year and comprising Athlone Town Centre, centres in Gorey, Tipperary, Galway, Kilkenny and Templeogue in Dublin. Rumours in the market are that this has been acquired by Davidson Kempner for some €115 million.
The most interesting changes to note over the course of these sales include:
**Buyer profile:**in general, bidders have been foreign private equity investors who have tended to team up with local asset management expertise, attracted to this sector by the returns on offer and the opportunity to drive higher returns through active asset management opportunities.
They generally have a defined timescale and target returns for holding the investment and once these returns have been reached, they look to sell on. It is likely that some assets in the portfolios mentioned above will trade again, with off-market transactions becoming a feature.
For good quality assets, institutions are likely to enter the fray once retail trade shows further signs of stability and the risk of falling rents fades.
**Sales process:**most sales have tended to involve a two-stage bidding process with significant due diligence required by bidders with no guarantee of success. This process has proven costly and frustrating for unsuccessful bidders, with buyer fatigue emerging and some potential buyers being put off by this process.
Expect single bid processes to emerge. The Cornerstone portfolio was initially due to be a two-stage process, however, it is understood that the preferred bidder was selected after the first round.
**Pricing:**another trend is the narrowing of the differential between asking prices and actual disposal prices. Some early sales were concluded at 30 to 40 per cent over the asking price, while Cornerstone is reportedly selling at close to the guide, with the Harvest portfolio selling below the guide price. Realistic guide prices are important for the investment market to encourage engagement.
**Increasing rents:**with retail sales in general improving and demand for retail units increasing, there are signs that rents are starting to stabilise and rise.
This reduces the negative value impact of upward/downward rent review clauses, with landlords likely to look to increase rents when the rent review cycle comes around again. This is an area where investors can drive value.
**Asset management:**it is important to understand who the buyers are. Investor demand is for opportunities with asset management angles. If there are no angles for the purchaser to add value and invest their capital and expertise, then the centre may not appeal to the opportunity buyers.
**Debt finance:**almost all of the retail acquisitions mentioned have been funded by cash. Most sellers have really only wanted to deal with cash purchasers given the execution risk of dealing with buyers seeking finance. The return of debt to the commercial property market is likely to be a feature of 2015.
The solid income stream and relatively high returns available from retail centre investments will make the debt financing model very attractive to investors, and will enable owners to refinance or sell to an increasing buyer pool.
With the fundamentals strong and a pool of active buyers, it is likely that strong activity in this sector will continue.
Sean O’Neill is a director with property advisory firm TWM; twmproperty.ie

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