If you believe everything you read, the rise of online shopping, an oversupply of retail space, and the demise of a long list of household name brands means the end of physical retail as we know it.
But has this led to a knee jerk reaction from lenders, with many refusing to lend on anything other than the most prime retail assets.
I can recall countless examples that demonstrate this is the case, but one of the most notable was a recent conversation I had with a reputable fund manager in Madrid. His account of how dismissive lenders are being towards secondary retail assets was astonishing, especially as it is clear that many still present excellent opportunities if you scratch below the surface. Across multiple geographies funding is tough to secure, even on retail properties with long term tenants that are trading well, with scope to be repositioned towards more mixed-use offerings, for example. Why then are lenders, in a highly competitive market, shying away from these opportunities?
Aside from bad press, one key reason is that too many are chasing simpler deals that provide a quick and easy route to yield – and most retail assets don’t automatically fit this criteria. But with more lenders in the marketplace than ever before, these simpler deals are now much harder to come by. As a result, lenders need to get better at analysing and understanding the opportunities that individual retail assets may provide, and look beyond the obvious. A top-down approach that focuses on top line numbers, and ignores a whole asset class like secondary retail will only lead to missed opportunities, especially in the current market.
Assets must be evaluated on a case by case basis, by looking at multiple metrics that will help reveal whether or not they offer value. For example, is there an oversupply or undersupply of retail space in the surrounding area? Is the location an area likely to benefit from population growth and connectivity that will support future footfall? Is space - previously locked into long leases – set to be returned offering owners the chance to reconfigure the shopping centre with new F&B, leisure concepts, flexible workspace or pop-up retail space? Are many existing tenants capable of adapting to a more omni-channel world with online and offline strategies that complement each other? What proactive asset management strategies are planned or already in place to adjust to changing consumer behaviour?
“Niche lenders in particular should consider retail assets, as many of the transaction sizes won’t interest the larger banks”
I could go on! But the point is there are many important variables to consider, and sure, analysing the ones that matter will mean more work for lenders. But they should remember that by looking at secondary retail assets they will be differentiating themselves. They will also be operating in an unloved sector with less competition, increasing the likelihood of securing the deals they go for.
And for an example of how an under-appreciated asset class can become fashionable you have to look no further than secondary industrial; all those old trading estates on the edges of cities now shiningly rebranded as last mile logistics. There are plenty of lenders and investors who wouldn’t have touched this asset class a decade or so ago, now keen to get a piece of the action. So who knows where distressed retail assets could be in 10 years’ time.
Niche lenders in particular should consider retail assets, as many of the transaction sizes won’t interest the larger banks. Those willing to develop the necessary expertise, work on a case by case basis and look carefully beyond the headlines are likely to reap the rewards.
Matthew Van Lorson is founder of London-based real estate debt adviser Sanova Real Estate Finance