The value of retail properties selling at auction has dipped for the second consecutive quarter as sellers show growing confidence to bring assets with short-term income to market.
During the third quarter of this year, the IPD UK Retail Property Auction Index (RPAI) – which is produced by MSCI in conjunction with leading specialist auction house, Acuitus – showed a quarterly fall in capital values of -3.8% which followed a similar decrease in Q2. During 2014, the index had increased by 10.9% as economic conditions improved and investor confidence strengthened.
Acuitus Chairman, Richard Auterac, commented: “The movement of the RPAI this year seems counter-intuitive in the face of improving economic conditions.
“However, as the UK economy improves and there is a growth in real earnings and strengthening consumer confidence, property investors are taking the opportunity to restructure portfolios and are releasing into the market assets which would not have found buyers at valuation even as recently as a year ago.
“Accordingly, we believe the recent dip in the RPAI reflects the high proportion of short-term income retail properties passing through the sale room recently. These properties have, pro rata, a weaker value profile than the bulk of retail assets which
have found buyers in the auction room during the last 2-3 years. The consequence is the pricing index falling at a time of greater economic stability.
“Once this weaker product works through the system we would expect to see a strengthening in the index.”
Paradoxically, the sale of these value-depleted properties perhaps points ultimately to greater confidence in the long-term prospects of the retail property investment market. The improved economic landscape suggests rental growth potential will return to some locations. This is not reflected in the current RPAI yield, but is the evident trend of High Street shops in the IPD UK Monthly Property Index.
During Q3, the IPD UK Monthly Property Index – which measures the performance of £6.4bn of retail property – showed a 1.2% increase in value of standard shops which reflected year-on-year growth of 4.6%.
MSCI Senior Associate, Colm Lauder, comments: “At present, there is a clear disparity between the trajectory of the RPAI and the performance of standard shops in the IPD UK Monthly Property Index. However, we feel that this is reflecting the expiration of historic leases – many of which were struck at the peak of the market – and are now being re-priced to reflect the new market conditions.
“Additionally, a lot of these older leases are for properties which are now effectively obsolescent, and so values – and income – have been weakened. An increasing number of these properties are actually being bought with an alternative use to retail in mind.”
The Q3 report can be viewed here
