german-hawk-group
Opportunities do still exist
Market Letter #4 '06
Many investors are looking for retail stores with long leases and triple A tenants. Discount food retailers like Lidl, Plus, Penny, etc. are very popular.
A few years ago nobody wanted them. Now the market is almost sold out. Opportunities do still exist, but investors face higher risks.
Around 3 years ago nobody wanted discount food retailers, even if they yielded reasonably well with cap rates of around 8 % and lease terms from 12 to 15 years.
At the moment the market is saturated. There are almost no stores with long leases or triple A tenants left. Developers have even made general agreements with Danish, English, Irish, Swiss, Israeli,… investors for the years/ stores to come. And don’t forget: it takes approx. 2 years from start to completion to develop one of these discount stores.
And … competition brings yields down.
Consequently high demand surplus results in lower yields. If you’re lucky and can get hold of a newly developed store, expect yields to be around 7.0 to 7.4 %. Otherwise you’ll have to compromise.
| Remaining lease term | 0-5 ys | 5-9 ys | 9-12 ys | 12-15 ys |
|---|---|---|---|---|
| Cap rate approx. | 8.86-15.26% | 7.24-8.90% | 7.05-7.75% | 7.0-7.4% |
The table above is derived from our database and is intended to give you an idea of cap rate corresponding to remaining lease. The longer the lease the lower the cap rate. With leases less than 5 years the cap rate increases rapidly to around 15.26 % - as there is more risk involved in a lease extension.
Of course every store and location is unique. That’s why no overall hard and fast listing can be given.
How to take advantage:
Remember: no guts, no glory. We see good potential in stores with only few years lease term left. Stores with remaining leases of less than 5 years are relatively cheap as nobody wants them.
But, if you are well prepared and able to forecast a lease extension or better a rent review, then this could be a very big deal.
However: no guts no glory!