Divergence within UK Retail Parks
29.07.24
With UK Retail Park mainstay Carpetright falling into administration, we thought it worthwhile to examine the credit risk across the top 20 UK retail park occupiers. UK Retail Parks attract a wide range of retail types and the top 20 include DIY specialists such as B&Q, discounters like B&M and Home Bargains, and grocers like J Sainsbury and Tesco.
Income Analytics’ give all companies an INCANS® Tenant Global Score from 1 to 100. These relate to a probability of default and predict the likelihood that a company will seek credit relief or fail, 1 being the worst. The unweighted aggregate score of the top 20 retail park occupiers is 74/100. To give this context, the UK retail average is 68 so the top 20 average is better than the wider market. It is bolstered slight by the presence of grocers who are typically stronger than general retailers, but DIY specialists also out-perform UK retail.
We also calculate the probability of default across this retail group, and we can compare it to corporate bonds to calculate an equivalent bond default risk. Unweighted, this group of 20 would have a default risk equivalent to BB+ i.e. borderline investment grade corporate bonds.
However, this is where it becomes important to look at the mix of risks across the top 20. It may surprise you. The left-hand chart shows the distribution of the risks across this group, with some occupiers facing a much greater probability of default than others. The right-hand chart shows the equivalent bond default risk across the same group. Just 1 of the top 20 fall into the Low Risk category, though good news for investors in this sector, 12 are Medium-Low Risk. That means 65% of the top 20 occupiers would be considered at little risk of defaulting on their leases. Landlords just need to worry about the remaining 35% who find themselves at more risk of struggling to meet their lease obligations in the future.
Landlords will want to ensure that are either managing their leasing to ensure they have the right tenants in place to minimise their income risk, have guarantees in place, or look to right-size the rent to get as close to risk-neutral as they can.
Related Stories
Office Inflection
July 19th 2024, London. Investors to make sense of the strong credit ratings of many of their typical office tenants, with slowing take-up and falling values across the sector.
Anne Conlan Joins Income Analytics
July 9th 2024, London. Anne Conlan has joined Income Analytics as Account Director to support existing clients.
Income to Drive Total Returns
July 4th 2024, London. Real estate association INREV released a survey showing 79% of respondents believe income will drive return. How are investors ensuring they have strong, stable cashflows?
Q1 2024 Income Analytics T200 Reports
May 22nd 2024, London. Office occupier scores are stable across all regions, while some UK sectors are being hit by the cost of living crisis.
Q4 2023 Income Analytics T200 Reports
March 6th 2024, London. UK retailer scores struggle to improve while European logistics operators trend higher. Healthcare continues to be strong globally.
Income Risk is Specific. Avoid Averages.
Focusing on averages can hid tenant specific risks.
Q3 2023 Income Analytics T200 reports
November 28th 2023, London. A common theme across all our regional T200 reports is a recovery of the leisure sector tenants post-pandemic. They have bounced back from a low base, and typically record INCANS® Tenant Global Scores below their regional averages, but they are the fastest improvers.
Matthew Richardson Interview: Further Corrections and Opportunities to Emerge
The main trends impacting the sector are non-property, external factors, our co-founder & CEO Matt Richardson pointed out when speaking with Real Asset Media at EXPO Real 2023. These are, notably, interest rates, central bank policy and political policy.
Q2 2023 Income Analytics T200 reports
August 22nd 2023, London. The latest T200 reports from Income Analytics (INCANS) shows a mixed picture for retail sector tenants across the UK, Western Europe and North America. In Europe, retailers score below their regional averages, while in North America they trend above the average. The leisure sector has improved but remains below average in Western Europe, while has rebounded after the pandemic to score above average in the UK and North America.
Q1 2023 Income Analytics T200 reports
June 20th 2023, London. The latest T200 reports from Income Analytics (INCANS) shows the UK hospitality tenants continuing to be the best improvers, albeit from a low base after the pandemic. However, their European counterparts have not shown as much improvement. European pubs & restaurant scores have remained static over the last 12-months. In the US however the same tenants are seeing falling scores. Perhaps discretionary spend has been hit harder in the United States. Motor dealerships, a representation of larger discretionary spending, has seen tenant scores (and therefore the likelihood of default) fall across all three regions.
Income Analytics welcomes new team members
Michiel Foekens has joined Income Analytics as Director of Sales to help drive our exciting and ambitious growth plans.
Income Analytics Launches Income Risk Reports “T200”
April 27th 2023, London. The Income Analytics (INCANS) UK T200 report shows hospitality sector tenants are less likely to default than 12 months ago. The sector is not out of danger, with average rates still below the UK all sector average, but there is clear improvement. Pubs & restaurants recorded the largest positive change across all sectors.
Real estate data veteran Mallinson joins Income Analytics
February 6th 2023, London. Income Analytics (INCANS) announced today that Simon Mallinson has been appointed as its Chief Operating Officer. Established in 2020, INCANS is focused on helping clients quantify tenant income risk and minimise future losses. “We are excited Simon Mallinson has joined us as we enter the next stage of our growth” said Matthew Richardson, co-founder and CEO of INCANS. “Simon has a wealth of global experience delivering real-time, actionable data to real estate professionals and is the right individual to reinforce INCANS growth”.
Retailer health check: who will be next after Joules?
Great to see our tenant default analysis feature in a recent piece by React News.
How NewRiver is stress-testing its portfolio
In a recent article run by EG, Pui-Guan Man looks at how real estate investors and owners are using INCANS® scores to help quantify the future cashflow at risk caused by potential tenant defaults.
UK CRE investment markets go "income only" as yield gap over bonds disappear
Since 2008, commercial real estate has enjoyed an unprecedented bull run in terms of capital value growth. That charge is now over. Today’s economic realities mean that the returns from real estate investments are likely to be “income only” for the foreseeable future. Under such conditions investors need to shift their attention to the quality and duration of their rental cashflows.