Beaten up for the best part of a decade, we’re well accustomed to seeing headlines on the decline of traditional high streets and shopping centres. Narrow high streets have proven to be too hectic, with shoppers trading long walks to their cars for online deliveries to the front door. Shopping centres faced similar headwinds going into the pandemic when lockdowns and social distancing accelerated the trend toward cheaper-to-manage retail parks, with large car parks and loading bays an attractive alternative to customers and tenants.

These traditional retail assets have long formed European CMBS collateral pools. Unsurprisingly, in recent years many of these assets have struggled, and when they have changed hands, they’ve done so at steep price discounts. One notable UK CMBS, ELIZA 2018-1¹, recently announced the sale of three shopping centres, which will result in losses on the senior-most tranche, the first losses on European AAA-rated CMBS bonds since the Global Financial Crisis. We avoided the ELIZA deal, primarily due to the collateral profile and outlook for the sector.

In stark contrast, retail park deals are being hotly contested, exemplified by UK property giant British Land’s (BL) recent £441 million acquisition of a retail park portfolio from alternative investment firm Brookfield. As owners of these assets since 2021, Brookfield managed the portfolio up, increasing occupancy rates and reducing rent arrears. These properties back loans in the AGORA 2021-1² CMBS deal, which transacted during the pandemic. At the time, we took the view that retail park-backed CMBS, such as AGORA 2021-1, faced a much better outlook than deals with loans on traditional shopping assets. This has broadly materialised in the contrasting collateral performance since. The proceeds from BL’s acquisition will be used to prepay the outstanding CMBS, despite the loan having been recently extended. With £711 million of retail park acquisitions since April this year, BL’s deal activity is a further positive signal for the sector, which continues to garner interest from both listed landlords and private capital.

For European CMBS investors, the contrasting fortunes of the ELIZA and AGORA deals highlight the need to be highly selective when picking retail CMBS. On the one hand, traditional shopping asset-backed deals are now often facing maturity extensions, special servicing³ and even default. On the other, the likes of retail park assets continue to deliver solid collateral performance. Ultimately, CMBS are highly idiosyncratic – it pays to properly get to grips with the collateral and understand the potential impacts of emerging secular trends. Those who don’t, could continue to get burned.

Footnotes

¹ Elizabeth Finance 2018 DAC.
² Agora Securities UK 2021 DAC.
³ Special servicing is where a third party is brought in to manage and resolve CMBS loans for borrowers who have defaulted or are at risk of default.

IMPORTANT INFORMATION

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

There is no guarantee that past trends will continue, or forecasts will be realised.
Past performance does not predict future returns.

 The information in this article does not qualify as an investment recommendation.

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