The gap between the yields achieved on high street retail properties with the shortest leases and the yields on the longest is widening, suggesting a “flight to quality”.
New research by Allsop, shared exclusively with EG, tracks the yields achieved on high street investment sales at auction from December 2015 to October 2016 and from December 2016 to October 2017.
The first Allshop Barometer is based on 648 properties sold at Allsop auctions over the two- year period for a total of £390m: 179 with three to five years unexpired; 265 with five to nine years unexpired; and 204 with 10 to 15 years unexpired.
Partner George Walker said that one of the many drivers behind hardening yields for longer terms unexpired was more demand from former residential investors. “They want to buy commercial and are more comfortable with lower yields,” he said.
Another key factor driving yields down is that leases with 10-15 years unexpired will have been agreed after rents stabilized following the 2007-08 downturn, meaning such properties are not over-rented and the rent may rise in the future.
Investors were “spreading their wings” and were “happy to give longer leases a go in the regions,” Walker added. In Wales, for example, yields for longer leases have gone below 7%. However, caution remains around weaker locations in the North East, for example.
The research also shows that the yield gap between shops with five to nine years left on the lease and those with 10-15 years is narrowing. This suggests investors are recognising that lease lengths are generally becoming shorter and that 10- year leases without a break clause are increasingly rare.
In East Anglia, for example, yields for five to nine years unexpired fell from just over 8% to just below 7%. “We have seen people move out to East Anglia. They have identified it as a point of value,” Walker said.
What’s in a yield? Case studies
■ Poundland store, Dudley, West Midlands, sold in October for £850,000, a 13.1% yield
The property was “over rented” and lacked certainty – if Poundland vacated in 2021 upon the expiry of the lease, very few occupiers could take this 50,000 sq ft store.
■ Poundworld store, Fleet, Hampshire, sold in May for £960,000, a 6.9% yield.
The property provided a similar lease length to the Dudley store as there was a tenant option to break in 2022 (subject to a break penalty) but it was let on a new lease subject to a fixed uplift in 2022. However, the yield achieved at auction demonstrates the demand for a rack-rented shop, despite the 2022 break clause, because it gives investors more confidence in the certainty and growth potential of the rent.
■ Wilko store, Swindon, Wiltshire, sold in October for £2,500,000, a 12.6% yield.
The rent was significantly higher than the market rent and the tenant had made it clear they were leaving upon expiry of the lease in 2019, so there was no certainty.
■ Boots store, Wantage, Oxfordshire, sold in October for £995,000, a 5.9% yield.
This property was let on a similarly short lease to the Wilko, expiring in 2021, but the rent had recently been increased at review. So the fact that a market rent had just been agreed gave investors confidence to pay 5.9%.
■ Peacocks store, Dorchester, Dorset, sold for £3m in October, a 4.6% yield
This property offered long income with 24 years left on the lease (expiring 2041 with no breaks) and in a good trading position.
■ Peacocks, Sunderland, Tyne and Wear, sold for £675,000 in July, a 10.6% yield.
The lease was relatively new so likely to be rack rented, but only provided income certainty for about 3.5 years. Location and length of income are the fundamental differences between this investment and the property in Dorset.