Buyers Are Wary Of Big Malls Even As Leasing Market Heats Up

Signs of confidence returning to the repriced European shopping centre sector prompted Goldman Sachs in June to press the green button and put Ireland’s largest mall on the market with a guide price of €650M-€725M.

The timing looked bold but, even as the commercial real estate sector is hit by investment jitters, Goldman Sachs is far from the only flagship mall owner to be testing the market’s readiness to reinvest in major retail destinations.

French investor Frey bought the Polygone Riviera open-air shopping centre in Cagnes-sur-Mer, France, in October from Unibail-Rodamco-Westfield for €272.3M, while ownership or significant stakes in a number of major UK centres are reportedly on the market after a long period of moribund retail trading.

The rationale is simple: Retail has been through the global financial crisis, online competition, the shift to an experience economy and the pandemic — and has come out the other end battered, bruised but resilient. 

But even as shopping centre leasing performance improves, prices may still have to fall further to help Goldman and its fellow sellers find buyers.

“Prices have got to fall — even at double-digit yields some malls have failed to attract any investor interest,” Madrid-based Eurofund Group President Ian Sandford said of any fresh impetus in the transactional landscape. “But the occupational market is really busy, so if you can find the right deal then there is a lot of asset management that can be done.”

Despite being an active acquirer, having bought Silverburn in Glasgow, Scotland, from Hammerson and Rhein-Ruhr-Zentrum in Essen, Germany, with Signal Capital Partners, Sandford said he sees little evidence of traditional retail property buyers back in the market, due to the high cost of financing and unrealistic pricing.

However, he said it is an asset class where if investors are “prepared to roll their sleeves up” there are lots of opportunities to add value, boost footfall and rents and turn assets around.

“What I would say is that I have never seen a situation with the divergence that currently exists between the strength of the occupier market and the strength of the investment market,” he said. “Normally they align but right now we’re experiencing really strong leasing and very confident expansion plans from the major retail groups, but that is not matched in any way by investment sentiment.”

What does that mean for Blanchardstown Centre, the massive Dublin shopping centre Goldman is trying to sell?

The owner of the centre told Bisnow there is no update on the sales process, which is being handled by Eastdil Secured and CBRE.

Goldman Sachs was originally the lender to the Blanchardstown Centre, and it took control of the property for around €750M in December 2020 in a deal with Blackstone, which had paid €950M in 2016 to buy it from Green Property, making it the most expensive property ever sold in Ireland.

The 1.1M SF scheme has undergone extensive asset management since its latest acquisition, including the opening of flagship Zara and Flannels stores to replace Debenhams and the debut of Nike’s Unite format, plus the recent opening of a Lego store amid its 188 shops. It attracts 16 million people annually, with a catchment of 1.9 million people.

Earlier this year, AEW highlighted Dublin, along with Stockholm, Paris and the UK regional markets, as the standout shopping centre markets, while among high street retail markets Dublin, Berlin and Paris ranked top.

But Sandford said for transaction volumes to unlock, prices need to fall, because in the current unstable economic and political scenario, banks are unwilling to lend and financing is too expensive to make acquisitions add up.

The market is witnessing far greater potential activity than at any time for some years, but that will is only sporadically translating into confirmed deals.

In March, Landsec acquired 100% ownership of the St. David’s shopping centre in Cardiff, England, after Intu’s administration. It also took on the adjacent former Debenhams store, owned by British Land, which it plans to transform with a focus on new bars and restaurants.

Landsec is reportedly in the frame to acquire Abu Dhabi Investment Authority’s 69% stake in Liverpool ONE, while Meadowhall in Sheffield, England, could be up for grabs at £750M from British Land and Norges Bank Investment Management.

On the south coast of England, IKEA property arm Ingka Centres is closing in on a deal to buy Abrdn’s £175M Churchill Square centre in Brighton, and Savills has brought The Beacon in Eastbourne, owned by Legal and General Investment Management, to market for circa £80M. 

In addition, Unibail-Rodamco-Westfield completed the acquisition earlier this year of Hammerson’s 50% stake in the Croydon Partnership, which includes the Whitgift and Centrale shopping centres, high street retail frontage, office blocks and multi-storey car parks.

It seems the smaller, local and community schemes, plus retail parks, have been easier to trade than large centres. Blanchardstown is part of a new wave of major regional centres testing the water across Europe, according to Colliers Director of Retail Capital Markets Pierre Kunkler.

“Retail has faced a lot of well-documented structural issues but we saw those bottom out perhaps 12 months ago, and certainly in the UK the business rates re-evaluation earlier this year has helped retailers with their physical footprint,” Kunkler said.

“In terms of secondary and tertiary centres, we’ve seen a very quick repricing since the pandemic and that has encouraged activity, and demand has been there at the smaller end and among local authorities,” he added. “Many of those buyers can see value in those deals and generally speaking we have probably reached the bottom of the market. It has been much quieter for the big-ticket centres.”

He pointed to an extremely low level of deals for schemes in the UK above £50M, with only five in Britain in the year to date, and only two above £100M. Yet with occupation generally robust and new entrants coming into the market, again the tenant market continues to offer opportunities — if the price is right.

“We have seen more Middle Eastern money looking at the UK, and U.S. investors, in part because local authorities are much more flexible in terms of planning for repositioning centres, but again these are often neighbourhood projects attracting entrepreneurial investment,” Kunkler added.

In July, Hammerson hired Eastdil Secured to advise on the refinancing of the €306M debt it has secured against its 50% stake in Dundrum Town Centre in Dublin. That loan matures in September at 40% loan-to-value and 5% all-in interest costs, according to its 2022 annual report.

The Ardent Cos. UK Managing Director Andrew Hilston said he agrees with Sandford about the pricing gap but he feels acquisitions are possible, although he said buyers need to be highly selective. U.S.-headquartered Ardent’s London office has made two purchases, at Touchwood shopping centre in Solihull and The Royal Exchange in the City of London.

“We had a mandate from the U.S. to look at areas where we thought there was a dislocation between true long-term pricing and current price, and then Touchwood came across our desks. We thought that it offered good relative value compared with other asset classes and we bought it for just under 10% initial yield for £90M,” Hilston said.

Since then Ardent has signed a raft of new deals, upsized incumbent retailers and renewed leases in a centre that he said has been able to capitalise on its affluent catchment and city centre location.

“Every retail asset has its individual characteristics, and having seen some stabilisation of rents in the States, there's a philosophy where we feel that the UK follows the U.S., and we saw an opportunity at Touchwood,” he said. “We have looked at others, but we could never quite get the pricing. There's still a gap where vendor expectations are hanging on to heyday pricing and what we think of as the true long-term base.”

Hilston said that in his view, the U.S. has been ahead of the UK in repositioning centres and that for any acquirer, every centre will need a capital expenditures allotment to make physical improvements or tenant mix improvements.

“Not everyone has that capex. If you're the previous owner who has been through that value adjustment cycle, it's harder to justify than if you're a new entrant coming in at a low base. Providing you make that allocation in your model then you're perhaps better placed to enjoy the benefit of that,” he said.

Like Sandford, Hilston said financing has become more complicated as interest rates and inflation have taken their toll on investor appetite, and although he said Ardent had seen yields move in over the last two years, high interest rates have slowed the progression of retail as a “more loved asset class.”

“It's not complete. I think we've started the journey. We're maybe 20% into the process and I think it's going to be a gradual process of rents washed through and stabilised a bit more. But for fundamentally good retail we're interested and we're acquisitive,” he said.

With most flagship schemes trading well and more confidence around the occupational side, many vendors will not be motivated to sell at a perceived discount to value, yet with few buyers circling as yet, closing the expectation gap may be the only way to see Blanchardstown and its like get a sale over the line.