Retail property: not quite dead and buried
The Ediston Property Investment Company offers value to those seeking income, says Max King.
The Ediston Property Investment Company offers value to those seeking income.
The casualty list of retailers and restaurant chains grows ever longer, casting a deep shadow over the retail property market. Blame is apportioned between internet shopping, business rates, overexpansion, rising costs, faltering demand and, inevitably, Brexit. But Calum Bruce, a director of Ediston Real Estate, adds some other factors.
Many of the property leases now causing pain were signed before the financial crisis, with upwards-only rent reviews at a time when ample credit encouraged both overexpansion and excess consumer spending, he points out. As a result "60% of the market is over-rented; retailers have simply overpaid". Those who are struggling have failed to adapt to changing markets.
Others worry that the rules covering Company Voluntary Arrangements (CVAs, an insolvency procedure) are too lax, exaggerating the distress of retailers. Stephen Springham of estate agent Knight Frank was prompted by Carpetright's CVA to question whether it truly was a case of "genuine distress". Have CVAs become "a lifestyle choice to enable companies to cut rents rather than a vital restructuring tool?"
"A bit of uncertainty in the market is a good thing, causing some to panic and make poor decisions," says Bruce. "If you keep a level head and have the time and resources to do your homework, you can pick up bargains." He believes 80% of retail sales will always be done in-store, but retailers need to adapt. Buying online is easy, but deliveries and returns aren't, so many retailers subsidise them. They prefer "click & collect" where customers buy online and collect in-store with three-quarters buying something else while there. Equally, some customers may prefer to shop in-store for home delivery. There is still a future for physical retailing.
Ediston's strategy is to focus on retail parks rather than shopping centres or the high street. "Shopping centres have high costs for heating, ventilation, cleaning and security. These can together add £10 a square foot to rents, while the service charges for out-of-town open-air retail parks are only £1-£1.50 per square foot." Ediston also seeks retail parks without local competition or any possibility of it.
With each surveyor covering just six properties, Ediston can micromanage its properties, speaking to store managers, visiting tenants, and seeing opportunities that might otherwise be missed. This applies equally to Ediston's office properties in Newcastle, Edinburgh, Bath and Birmingham, where there may be opportunities to extend leases, increase tenants' space and raise rents. "Shopping centres and the high street may be over-supplied... but offices, industrial and retail parks are undersupplied," says Bruce.
The shares are great value
Despite this optimistic, differentiated and value-adding story, the shares of Ediston Property Investment Company (LSE: EPIC) £350m of assets, £220m of market value trade at a 9% discount to asset value and yield 5.5%, fully covered by earnings; the dividend was increased by 4.5% this year. Borrowings are 31% of gross assets, giving limited opportunity for acquisitions, but Ediston has a record of selling mature assets to reinvest in those with potential. Meanwhile, there is plenty of work to be done on the existing portfolio. There isn't a trophy asset in sight, but the shares represent great value for income-seeking investors.