Yield gap continues to widen in retail – DTZ

The yield gap between prime and secondary retail property widened further during the second quarter of 2011, as investors continued to seek good-quality, well-let properties – assets that are in short supply. DTZ’s Q2 Retail Investment Market research shows that institutional investors again drove transactions in shopping centres, high-street locations and retail warehouses, but their focus was on prime.

“With banks stepping up their workouts, and institutions avoiding non-core properties, secondary high street stock saw yields continue to shift outwards in Q2,” the firm notes.

The firm expects in particular that the gap between yields on prime and secondary shopping centre stock will widen further, with several significant asset sales that are about to complete set to provide evidence for this trend.

Weaker occupational demand, the steady stream of retailers going into administration, and widespread downsizing means that investors’ appetite for riskier secondary assets is still low, DTZ says. Private-equity buyers are seeking out assets that have potential for repositioning, but pricing is an issue.

Martin Davis, head of DTZ’s UK markets research team, says “Ailing retailers looking to downsize are likely to retain their prime locations because they will bring in more money – despite the higher rents. Retailers will be able to justify the rental costs because consumer spending in these prime locations is so resilient. As a result, the rental growth performance of secondary retail assets is deteriorating compared to prime.”

DTZ says retail trading conditions are unlikely to improve in the next quarter and expects vacancy rates on secondary high streets and shopping centres to rise as occupational demand continues to fall. It expects REITS to become more active in the shopping centre and retail warehousing markets during Q3 while institutions are forecast to remain the driving force in the high-street investment market, paying aggressive prices for prime stock.