Quadrant Partner John Maddison and Partner James Honeyman caught up with React News for a Q&A, taking an in-depth look at retail parks
Retail parks have been one of the winners of the pandemic. The past 12 months have seen a wave of deals and new players enter a market which has been pushed to the fore due to Covid-safe operations and parks’ flexibility in an omnichannel world.
However asset management and development company Quadrant is far from the new kid on the block, as it owns and asset manages retail parks across the country, alongside an office portfolio.
Quadrant recruited out-of-town specialist James Honeyman from British Land earlier this year, following in the footsteps of Quadrant partner John Maddison who was also a former British Land director and a stalwart of the retail park scene.
React News caught up with Maddison and Honeyman to discuss the evolving retail park market in the face of lockdowns and other consumer trends.
Let’s have a whistlestop tour of Quadrant and where you’re at right now?
John Maddison: Retail parks are still very much our focus. We’ve got 11 retail parks on the books, and what we started to do for the first time two years ago is asset management work, rather than only looking after things that we’ve invested in. We sold out an entire portfolio towards the end of ‘18, which feels like a reasonably good decision, mainly with KKR money which was a £500m deployment which they were very happy with and went very well timing wise.
The retail park space is an odd market, because retail warehousing feels like it got popular before it stopped being unpopular. At Christmas I thought there was going to be a feeding frenzy, and now I’ve got a lot of sellers convinced they shouldn’t be selling. So we’ve got this weird market, where there’s loads of people who want to buy, and not that many specialists like us to support them, then a bunch of sellers who can’t decide whether they’re actually sellers or not.
Are you looking to line up another KKR?
JM: We’re not looking for a new KKR in a literal sense, what we’d like to do is scale up with one investor in partnership, ideally. What’s different about this time from the financial crash period is there’s been several fairly seismic changes to the way returns and the risk-reward profile work. Not in the least tax changes to the offshore structures, meaning that the idea of underwriting high double digit, 20% IRR and two-times equity multiples now doesn’t really exist. What you really need is a more ‘core plus’ approach to capital, so there’s still opportunistic buying but within a different parameter.
Retail parks – is it time to cash in or time to hold on?
JM: We’ve already cashed out, we saw ‘18 as a optimal time to do that. We definitely think there’s a buy opportunity; the reason a lot of capital is looking at the sector is because yields, at face value, are higher than they’ve ever been. You’re double digiting on some fairly good retail parks, and obviously you can buy a lot of retail park for your money right now. You’re seeing assets that were sold for £50m or £60m five years ago, trading below £30m.
Some retail parks are doing really well, it seems like a market is in two halves? How has demand for retail park space shifted?
JM: The devil is in the details. So, unfortunately, there is no fashion market really per se, so a lot of the large schemes with multiple amounts of units are defunct. What’s really in trend now is the mid to smaller-sized convenience parks, with six to 12 units maximum. The requirements generally have been for bigger boxes, whereas we spent years carving little boxes into smaller pieces to drive rents even harder, which all just needs undoing now frankly.
Retail parks are seemingly one of the winners of the pandemic, why?
JM: What the pandemic has done for retail parks is it’s reaffirmed all the things we believed for many years now, the reasons we didn’t touch shopping centres at all, which is that they are accessible locations with large surface area car parks that are free of charge, near major arterial roads, they are big crinkly tin sheds, and they’re very flexible and affordable. We’re running service charges at £1.50, versus a shopping centre of £15 per foot, we’re running free car parks, we’re running a customer-led experience, but also it’s omnichannel now. It was easier to operate functionally than a town scheme with social distancing, but actually it is so much more than that because for years it’s been the only subset product that’s truly aligned to omnichannel retailing.
James, why did you join Quadrant, and how do you now see asset management coming to the fore?
James Honeyman: I’m joining at an interesting time to say the least. Quadrant’s market reputation is very, very strong as experts in the field, there’s a lot of people playing in the retail park arena without the record to back it up. John has lived and breathed assets over the years, which seems quite a simple thing to say, but it’s really important if you want to do asset management right. It’s not something you can turn off and turn on. You can’t pick the assets up every two weeks and hope to pick up where you left off particularly in such a difficult market.
How do you see your role in helping retail parks reinvent themselves? Will you be involved in repurposing assets?
JH: Retail parks have always reinvented themselves, whereas if you look in town all of the problems seem to be coming along at once, for shopping centres and department stores, hence why we’ve got such an issue at the moment. The compelling reasons to trade from retail parks have only been highlighted by the pandemic.
There isn’t a huge amount of repurposing needed, like there is in town centres. There are some parks that are no longer fit for purpose, or have a better residual value underneath them. But I don’t think it’s as straightforward as looking at it as a retail park conversion to logistics, or residential. There will be areas in the market for that, but a lot of these sites are still working, fundamentally, very strongly.
JM: We launched the repurposing business to focus on department stores, and have therefore touched the shopping centre and high street world. The reason we haven’t bought a lot in that space yet is because pricing just hasn’t moved enough. Debenhams’ collapse is finally going to be the catalyst for people to stop trying to just put a wider cap rate on the same Debenhams rent, and accept that it’s actually gone, and now we are at land value. That’s the only way you’re going to be able to make hay in that space.
So where do you see retail parks moving to as part of the need for last mile logistics?
JM: Polarisation has been real for many years now and people need fewer shops. Showrooming and other things we’re offering now as a product are very much catering to the overall retail market. What you’re doing inside that box is entirely arbitrary, and makes a lot more sense when rents come down. When rents were £40-£50 per sq ft, a retailer wouldn’t use it as warehouse distribution space, that would be illogical. But you can when you’ve got a product that’s been rebased. Shed rents and yields are going in strengthening directions rapidly, and therefore it’s bringing into focus a product that you can still afford to use, where rents are halving and yields are moving out to 10%. While suddenly, a shed that was £6 per foot and 7%, is now £12 and 4%.
How has the government intervention in the retail sector due to COVID-19 impacted retail parks?
JM: What we’ve seen in retail parks over the years is from every flame there’s been a phoenix or two. When MFI went bust along came Wren; there was a gap in middle-market kitchens and they sucked it up. We’ve always had new entrants, but one of the slight oddities of the market right now is that entrepreneurial flair has been stymied by the life support machine that’s been left on for many businesses that aren’t fit for purpose.
The moratorium on rent payments has meant some retailers have had a year without having to pay rent. If you can’t survive when you don’t have to pay rent, furlough has kept staff going, rates have been given for free, if you can’t survive with all those things in place then you really are in trouble. But ultimately those taps are going to have to be turned off and that’s when we’ll finally see those opportunities in the occupational market, as much as I hate seeing brands disappear.
As the rent moratorium is lifted, will there be more pain to come? And how much will that touch retail parks as many struggling occupiers are more fashion and town centre-centric?
JM: I think there’ll be more CVAs for sure. You owe a year’s rent to most of your landlords, why pay it when for X amount of credit fees you can get out of it. I don’t agree with the way that the structure has gone, but I actually think many people don’t remember how bad the pre-pack administration flurry was. You had people turning up in your office just saying: “This is what’s happening and there’s nothing you can do about it”.
The CVA gave us a better route and a better structural development. Now, you can be cynical about how many of them ultimately survived and whether it was just a stay of execution, but fundamentally when you’re writing off arrears and dilapidations, it just rides roughshod against contract law.
Shopping centres have had a habit of being the unlucky ones in most of these transactions and that comes down to turnover densities and performance of stores, but also shopping centre landlords quickly had to take the concessionary deals on the table because of service charges. When you lose a tenant you don’t just lose a tenant, you’ve got a bill in your hand for quite a lot of money for the service charge void, and the rates void, that a retail park just doesn’t have the same scale of.
The hit is so much harder because your true income is decimated by your void costs, and that’s why we’ll see more bank-style default in shopping centres, and department store-anchored schemes, than we will in retail parks. The number of retail parks, taken into banks’ hands will be very, very small.
What does the post-COVID, year 2025 role of retail parks look like to you?
JH: I think the trends are here to stay. Convenience, safety and security, and the omnichannel connectivity are not going away. If we start to get back some normality, I think it’s important to go back to your customer again. Both customer in the sense of the retailer, and also in the sense of the physical customers using the scheme. A lot of those changes are now embedded, and they will be expected from the customer using the scheme, so I don’t see this as a high point where post-COVID everyone drops back to previous habits and want to go around to local shopping centres.
As online continues to dominate the retail market, should there be more of an emphasis on shifting the tax and rates regimes to reflect that?
JM: Bringing in tax against online retailers, is akin to the calls a decade ago from town centre bosses trying to force parking charges on retail parks. You’re getting dangerously close to telling a customer what they can’t have even though they want it. That’s not great economics and ultimately retailers will beat the system if they want to.
Clearly someone needs to sort business rates, it’s archaic and it’s penal, but the way to solve something that’s failing is not to try and break the thing that’s working, it just doesn’t make sense. It’s always frustrating as an investor if you’re stuck with something that’s not going well, but ultimately you have to pivot, or move on.