December 17, 2015 / 3:36 PM / 4 years ago

Private equity takes gamble on Britain's unloved shopping centres

(Reuters) - Private equity firms are teaming up with specialist property managers to buy ailing British shopping centres, convinced that running them well will deliver a return on their investments.

Centres away from prime locations are struggling with declining visitor numbers due to the rise of online retailers and competition from malls where shoppers can dine out or watch a film.

For private equity, this risk promises steep returns that are increasingly hard to find elsewhere in a hot British property market, on the condition that management gets it right.

“You have to be very selective about which secondary shopping centres you go into,” said Manish Chande, a founding partner of fund management business Clearbell Capital, which bought a centre in Durham, northeast England last year.

The firm is revamping The Gates Shopping Centre, opened in 1975, by adding a cinema and riverside promenade to low-cost chains such as Poundland and Wilko.

It is also turning some space into accommodation for Durham’s large student population.

After the financial crisis, centres built on cheap loans struggled as consumers tightened their purse strings and more modern malls were built. Many fell into disrepair, deserted by the big high street names.

A recovery in retail spending has revived their prospects. Last year, rental value growth turned positive for second-tier centres for the first time since the crash, according to index provider MSCI Inc.

“The secondary market has gone through quite a painful process in terms of tenants leaving,” said Rhodri Davies, shopping centre investment head at property consultant CBRE. “There is a sort of sentiment now that the pain has been had.”


Where specialists such as property group Ellandi have been able to improve secondary centres by investing large sums, many others remain poorly managed and starved of funds.

“You’d be amazed at how important it is to provide people with, not just the basics, but also nice facilities, whether it’s car parks or toilets or bright malls. That’s often missing in small shopping centres,” said Mark Robinson, property director at Ellandi.

At a centre it manages in Dartford, south of London, this includes fixing a leak after buying the Priory Shopping Centre at a “discounted price” with London-based Tristan Capital Partners.

High profile U.S. private equity groups, among them Cerberus Capital, Lone Star Funds, KKR & Co and Blackstone, have been keen investors in secondary UK centres.

To get a return, an experienced asset manager is vital, according to Edward Cooke, Director of Policy and Public Affairs at the British Council of Shopping Centres.

KKR’s Glasgow asset, the Sauchiehall Centre, is in the hands of asset manager Quadrant Estates, which is seeking permission for a redevelopment. Sauchiehall has lost business to newer centres such as the St. Enoch Centre and Buchanan Galleries.


Mat Oakley, commercial research director at Savills, said 67 centres were under offer or on the market at September-end, putting turnover for 2015 on track to exceed the long-term average of 4 billion pounds.

“There is definitely an increase in private equity money, particularly from the U.S., going into the secondary... market as they chase heavily discounted assets,” said Colm Lauder, senior associate at MSCI.

Second-tier centre values are down 44 percent on 2007 peaks, whereas prime is down 14 percent, MSCI data showed.

And private equity has ample cash to jump in. The top 50 fund managers have raised $175 billion-plus (£117.4 billion-plus) to invest in property since 2009.

Second-tier centres are squeezed between large rivals such as Bluewater close to London or the intu Trafford Centre in Manchester and local convenience stores.

Those that do best tend to have a large catchment area, few competitors and plenty of well-known retailers priced appropriately for the demographic.

“It’s not really about the size,” said Adrian Peachey, shopping centre investment head at Jones Lang LaSalle.

“There are some smaller towns that continue to succeed very strongly as local retail destinations, while others have lost out to either developments in close-by towns or out-of-town offers.”

One way to increase rents is to add restaurants and leisure facilities, replicating destination centres in miniature.

Managers have also embraced discount retailers and sought to play a larger role in the community by organising events and installing health centres, gyms and betting shops.

Helical Bar followed that route after buying the Clyde Shopping Centre in Glasgow five years ago. It added a gym, sold an adjoining Asda unit and, in February, sold the mall for a profit.

The sale price reflected a net initial yield of 7.25 percent, comfortably within the 7.5-8.5 percent range, excluding leverage, typically targeted by private equity investors.

The new owners of the Clyde, Cerberus and Edinburgh House, have already started on further changes, bringing in discount retailer The Works.

Editing by Robin Paxton and Keith Weir

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