Copyright: David Lawson- Property Week May 1999Home page
Here we go again. Business parks burst on the scene a decade ago as a licence to print money, then retail warehousing took up the running in the Nineties. Now leisure is the sure thing of the next decade. Or is it?
Aptly, the latest moneymaker has rolled out at Printworks, the Manchester complex where Richardson Developments is reputed to have achieved a yield around 6% from BA Pension Fund and Henderson Investors for a majority stake.
How times have changed. Five years ago, this was a fringe market with yields hovering around 9%. MWB was not exactly inundated when it punted the idea of a limited partnership around institutions in 1996. Since then it has raised 135m pounds of equity geared it up to 400m pounds and funded 210,000 sq metres (2.25m sq ft) of space. Investors came swarming in to the second fund and the firm is now sniffing around the Continent for more opportunities.
FPD Savills calculates that a similar amount was raised across the whole investment market last year compared with a measly 17m pounds five years ago. Lee Richardson is obviously right to call it 'the sexy end of the sector'.
Does this mean leisure has matured, as some observers claim? If maturity is measured by big deals, it certainly has. Four made up half last year's spending, according to Hugh Colville of FPD Savills. A similar pattern is likely this year - and next. If it is measured by breadth and depth, however, that is a negative factor.
There is also no on-market. 'Why should anyone with long leases and good covenants, looking forward to fixed uplifts on review, consider selling?' asks James Clark of CB Hillier Parker, which has sewn up several deals for City Grove Leisure.
Values are being set by the limited number of top schemes, and these are few and far between. 'There are probably going to be no more than half a dozen really prime centres across the country,' says Andrew Appleyard of Henderson. The Printworks is one - although he refuses to confirm the reputed yield.
Like another craze, Internet stocks, shortage of product in a sector with huge potential is driving values sky-high for the best buys. Unfortunately, it may be over-cooking the rest.
Business and retail parks went through this trauma when backland scraps and poorly-located developments were lumped in with prime developments. Hundreds of leisure schemes have planning permission but few will prosper, says Appleyard. They will not win the strong covenants demanded by investors.
Knight Frank's latest Leisure Property Review points out the tightness of supply, with fewer than 100 parks open at the beginning of this year. Smaller ones in regional locations are not keeping pace with prime yields running at less than 6.5%, it says.
Appleyard is not convinced. 'Some secondary schemes are clearly over-priced,' he says. These doubts cloud what appears to be a bright new market. Property companies are having a field day because they can borrow cheaply and gear up. Overseas investors have also come in during the last six months to spice up demand even further, says Richard Claxton, an associate at Knight Frank. The hardening of yields in response to this influx is worrying some funds, however.
'The sector looks expensive,' says John Wythe, director of property fund management at Prudential Portfolio Managers, which has resisted involvement so far. He still sees the need for a premium to protect against the risk of cineplexes, bowling alleys and fitness training fading out of fashion.
'Is it a property investment or a business? he asks. 'We can get exposure to businesses through equities. If it is property, it must have the right qualities of location and alternative uses.'
David Hunter of Argyll is another abstainer. Like the Pru, he does not rule out ever touching leisure investment but worries about the impact of changing tastes and fashion. 'Years ago people would have said cinemas would survive for ever. Now they are saying cineplexes will do the same,' he says.
Maturity is also difficult to accept when leisure is still such a small sector. Colville points out that it makes up less than 1.5% of the IPD Index and is still not calculated separately. Funds are therefore left without performance benchmarks.
All this reluctance towards direct involvement makes life that much merrier for groups like THI and MWB. They saw which way the wind was blowing early and snapped up many of the best schemes cheaply. They now prosper by acting as intermediaries to funds who want a share of the action but cannot find the right product.
Despite an initial reluctance to the first MWB fund, the second geared up to 250m pounds in five months, attracting new investors like CIN, Hermes, United Friendly and Shell Pensions. And there is plenty more where that came from, says MWB director John Harrison.
He figures around 500-600m pounds of funding is waiting for the right products. 'There is a lot further to go and more limited partnerships will open up,' he says.
Getting at that money could be tough for new players, however. He has been schmoozing landlords for five years, making sure of an edge when the right moment comes. That netted the O2 Centre in London's Finchley Road for 61.6m pounds earlier this year - considered one of the best in the UK. Riverside in Norwich was bought for the second MWB fund in an off-market deal after Harrison tracked the scheme for three years.
He dismisses fears that these are business deals rather than pure property transactions. 'It may be specific to a particular use but no more than shopping is for retail property,' he says.
And, crucially, this is one sector where long leases and strong covenants are not a problem. That is why overseas and private investors are so voracious.
They should take care not to push the boundaries too far, however. Steve Evans, head of leisure at GVA Grimley, warns that contrary to the hardening of yields, tenants' prospects have been softening. Cinema visits are down on a year ago and tenant demand is not as good, he says.
Developers will need to be careful about factors such as management, tenant mix and circulation spaces between buildings if they aim to attract investors cautiously watching attendance figures.
Appleyard insists that Henderson's record-breaking deal should not be seen as a sign that it will be rushing in to similar arrangements around the country. Printworks is a 'category killer', he says. Only a handful of other developments could boast the advantages of an in-town location and such strong covenants as Virgin, UCI and Holmes Place. In any case, he could only see around 2-3% of the 1.7bn fund going into the whole leisure sector.
'It is a diversification,' he says. 'But if you are selective and careful, you can make money.'