Private equity takes gamble on Britain's unloved shopping centres

* Private equity seeks bargains in UK shopping centres

* Secondary centres suffered after recession

* Discount prices offer promises of good returns

By Esha Vaish

Dec 17 (Reuters) - Private equity firms are teaming up withspecialist property managers to buy ailing British shoppingcentres, convinced that running them well will deliver a returnon their investments.

Centres away from prime locations are struggling withdeclining visitor numbers due to the rise of online retailersand competition from malls where shoppers can dine out or watcha film.

For private equity, this risk promises steep returns thatare increasingly hard to find elsewhere in a hot Britishproperty market, on the condition that management gets it right.

"You have to be very selective about which secondaryshopping centres you go into," said Manish Chande, a foundingpartner of fund management business Clearbell Capital, whichbought a centre in Durham, northeast England last year.

The firm is revamping The Gates Shopping Centre, opened in1975, by adding a cinema and riverside promenade to low-costchains such as Poundland and Wilko.

It is also turning some space into accommodation forDurham's large student population.

After the financial crisis, centres built on cheap loansstruggled as consumers tightened their purse strings and moremodern malls were built. Many fell into disrepair, deserted bythe big high street names.

A recovery in retail spending has revived their prospects.Last year, rental value growth turned positive for second-tiercentres for the first time since the crash, according to indexprovider MSCI Inc.

"The secondary market has gone through quite a painfulprocess in terms of tenants leaving," said Rhodri Davies,shopping centre investment head at property consultant CBRE. "There is a sort of sentiment now that the pain hasbeen had."

BACK TO BASICS

Where specialists such as property group Ellandi have beenable to improve secondary centres by investing large sums, manyothers remain poorly managed and starved of funds.

"You'd be amazed at how important it is to provide peoplewith, not just the basics, but also nice facilities, whetherit's car parks or toilets or bright malls. That's often missingin small shopping centres," said Mark Robinson, propertydirector at Ellandi.

At a centre it manages in Dartford, south of London, this includes fixing a leak after buying the Priory Shopping Centreat a "discounted price" with London-based Tristan CapitalPartners.

High profile U.S. private equity groups, among them CerberusCapital, Lone Star Funds, KKR & Co and Blackstone, have been keen investors in secondary UK centres.

To get a return, an experienced asset manager is vital,according to Edward Cooke, Director of Policy and Public Affairsat the British Council of Shopping Centres.

KKR's Glasgow asset, the Sauchiehall Centre, is in the handsof asset manager Quadrant Estates, which is seeking permissionfor a redevelopment. Sauchiehall has lost business to newercentres such as the St. Enoch Centre and Buchanan Galleries.

BUSINESS PICKS UP

Mat Oakley, commercial research director at Savills,said 67 centres were under offer or on the market atSeptember-end, putting turnover for 2015 on track to exceed thelong-term average of 4 billion pounds ($6 billion).

"There is definitely an increase in private equity money,particularly from the U.S., going into the secondary... marketas they chase heavily discounted assets," said Colm Lauder,senior associate at MSCI.

Second-tier centre values are down 44 percent on 2007 peaks,whereas prime is down 14 percent, MSCI data showed.

And private equity has ample cash to jump in. The top 50fund managers have raised $175 billion-plus to invest inproperty since 2009.

Second-tier centres are squeezed between large rivals suchas Bluewater close to London or the intu TraffordCentre in Manchester and local convenience stores.

Those that do best tend to have a large catchment area, fewcompetitors and plenty of well-known retailers pricedappropriately for the demographic.

"It's not really about the size," said Adrian Peachey,shopping centre investment head at Jones Lang LaSalle.

"There are some smaller towns that continue to succeed verystrongly as local retail destinations, while others have lostout to either developments in close-by towns or out-of-townoffers."

One way to increase rents is to add restaurants and leisurefacilities, replicating destination centres in miniature.

Managers have also embraced discount retailers and sought toplay a larger role in the community by organising events andinstalling health centres, gyms and betting shops.

Helical Bar followed that route after buying theClyde Shopping Centre in Glasgow five years ago. It added a gym,sold an adjoining Asda unit and, in February, sold the mall fora profit.

The sale price reflected a net initial yield of 7.25percent, comfortably within the 7.5-8.5 percent range, excludingleverage, typically targeted by private equity investors.

The new owners of the Clyde, Cerberus and Edinburgh House,have already started on further changes, bringing in discountretailer The Works. ($1 = 0.6701 pounds) (Editing by Robin Paxton and Keith Weir)