Sold For £1M: The Shopping Centre That Has Fallen In Value By 96%

Callendar Square in Falkirk is a poster child for the precipitous decline in value of secondary regional shopping centres.

The 125K SF mall in the centre of the Scottish town was valued at £26M in 2006, when it was part of a £920M refinancing undertaken by then-owner Propinvest. That is a 5.7% yield.

In December it was quietly sold at Acuitus' auction by owner Colony NorthStar for just £1M. The sale represented a yield of 61%, and a capital value of just £8/SF. 

Colony bought the centre in 2015 as part of a £310M deal when the Propinvest portfolio went into administration. It is difficult to say the value put on the centre as part of that deal, as selling agents did not ascribe individual values to the assets, leaving it to the buyer to come up with an overall price. Colony declined to comment.

Real estate values fell sharply from the heady days of 2006, but in many sectors they have recovered. Not in secondary regional retail, which experienced a recovery in both volumes and valuations from 2012 to 2014, but has sharply declined again since, according to Colliers. Callendar Square is an example of just how dramatic that fall has been.

Private equity funds like Colony are left pondering their strategy for assets for which there are very few if any buyers.

"We think there are about £4B-5B of secondary regional shopping centres in the hands of private equity currently,” asset manager APAM Executive Director Simon Cooke said. “Refinancing those has become more challenging, the occupier market has deteriorated since they were acquired and there is little or no longer-term capital looking at that sector.”

Callendar Square could be a harbinger of what is to come for the sector. Cooke said so far there has been no major downward revaluation of secondary centres because the dearth of sales means there is insufficient market evidence of what price they are trading. Deals like this provide that evidence.

After a sustained recovery, investors and asset managers are starting to talk again about distressed assets and bank covenants. But this time the hunters, private equity firms, are becoming the hunted, with asset managers like APAM staffing up to manage assets on behalf of current owners or creditors.

“Most of these funds have five-year lives, they are holding illiquid assets and now need to decide what to do with them,” Cooke said. “They might have debt covenants of 50-60% LTV, and even if they are not pushing up against them, there could be problems with net income covenants. A lot of tenants are trying to renegotiate rents and the covenant strength is weaker than it was four to five years ago. With this in mind, we are growing our regional presence to bring a focused specialism on recovery and repositioning asset management.”

The question becomes what to do with these shopping centres. In many ways the answer is simple — they should no longer be used as shopping centres. But changing a property's use is a complicated and above all expensive process, and the issue will be whether owners or creditors are willing or able to put in place the capital expenditure needed to convert centres.

“You need to have a proper long-term plan for the asset, which looks at the next 10-15 years, and then go in and implement it,” APAM Executive Director William Powell said. “There are a lot of stakeholders, like local authorities, banks and different property owners, who need to be properly advised in what is a very complex process. Many of these sites are in key town centre locations, and a lot of this will come down to change of use, whether that is to residential, nursing homes or other community uses.”

Back in Falkirk, even the income that Callendar Square does produce is very short term. A hotel that is part of the centre has a long lease, but almost all of the other retail units that make up the £622K of rental income have leases that expire this year or next.

The new owner, a private investor, has some tough choice over what to do with a struggling centre. It is a question that owners across the country are already asking themselves.