Shop investment: direct or indirect?
14 August 2025(2025 Aug) – Shop investment: direct or indirect? Direct is owning the property, indirect is a shareholder. Which is better depends upon judicious choice.
For direct ownership, cue is best taken from institutional investors. Pension funds have a longer time horizon. They do not pay 20 YP (5%) for 10 YP (10%) rack-rented investments. They do not buy on interest rates, but on growth potential: current and reversionary rental value.
Yield compression has distorted the difference. By introducing a valuation methodology that bears no relationship to the fundamental value of the property, only to the cost of borrowing, yield compression has influenced overpaying for ex-growth investments. The close-knit link between rent and capital value disconnected long ago.
Yield compression has rubbed off on valuation surveyors. Valuation reports are littered with examples of auction prices, despite auction prices bearing no relationship with the open market. Auction prices are not representative of the open market: they represent the price that someone on the auction day succeeded in paying. Just because auctions have overtaken private treaty as the No.1 method of transaction does not make properties at auction more valuable. All it means is that sellers are more likely to achieve higher prices and sell much quicker than if offered ‘subject to contract’.
Before yield compression entered investor thinking, a high yield was associated with no-growth or a problem property, a low yield with rental and capital growth. To afford on mortgage an investment whose rent does not cover the cost of borrowing requires other sources of income. Low yielding investments, the properties ‘worth’ buying, were and probably still are out of bounds for borrower-investors.
Cash buyers have also fallen into the trap. A cash buyer does not make an investor any the wiser. Landlords thinking they’re in control when actually it’s tenants that are in control means building into the purchase price more protection of the bottom line than normal. A typical example, a bank investment bought for security of rental income, until the lease expires, the bank vacates, the capital value drops circa 50% and finding a new tenant takes months.
A quantification for protecting the bottom-line is the discount that most quoted property companies think their shares suffer, but which for the shareholder provides a measure of protection that is generally unavailable in the direct investment market. Quoted propcos that think their shares are undervalued so waste money on buy-backs might achieve short-term response, but generally the share prices revert to norm. Without a substantial discount between NAV and share price, an assessment of the company’s value is akin to the yield compression that has taken hold of direct investment.
In favour of shares is that propco portfolios often include a quality of property rarely for sale. One must be careful. High-yield dividends typical of specialist REITs are a proxy for no-growth. Generally, I reckon propcos that were not REITs before it became fashionable to convert are a better bet.
To complement:
Quoted propcos on the London Stock Exchange. I’ve been looking at the dividend track record of some companies and one thing some have in common is that despite the board’s enthusiasm for how well the company is faring, the dividend doesn’t follow suit.
A difference exists between the board’s achievements and the stock market’s rating. The stock market looks ahead and share prices respond more to sentiment about the prospects than companies’ exuberance.
Consider for example NewRiver. A portfolio of mainly ex-growth shops whose tenants cater for local communities, a dividend that is less than last year and a share price falling, yet according to the board everything in the garden is rosy. It’s as if the board considers 9% divi yield ample for shareholders so why pay out more? So where’s all the money going? Salaries for directors and manager. Fees to external advisers. It’s against the FCA law to say buy or sell so you have to do your own research. High yield makes it hard for anyone to take over the company but who would?
Read the reports of Hammerson and Land Securities and both highlight that major retailers derive 30% revenue from the top 1% – 20 – shopping centres, of which Hammerson owns 10. I would think the other 70% derives from the 2nd and 3rd top which is a good omen. It means that for rental growth and share price performance and rising dividends, the only companies to share in are those that own shops in the top centres.
It used to be that for multiple retailers to have a branch in 1400 towns provided nationwide coverage. Then it became 200. Then 50 and very soon if not already it’ll be 10-20. My prediction some years ago that, except for their core prime positions, most provincial towns have gone ex growth seems to have come true. The decline of the high street is testimony. So while there will always be lettings, the chances of most retailers making enough to survive very long are slim. And they know it, which is why short leases are not a passing phase. And why in my opinion buying shop investments is likely to prove more expensive than buying shares in companies that own the very best.
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