Real estate is a simple business, but the devil is always in the detail. Nowhere is this more apt than with the retail sector. Where an industrial building usually has one tenant and an office building often only has a few, retail assets can have many dozens. To complicate matters, these tenants operate in numerous sectors, with some being a good fit for certain surrounding demographics, while for others the overall trade area around a retail centre is generally much more important.

Part of the challenge in analysing retail real estate is murky occupier metrics resulting in a lack of clarity as to how assets are actually performing. Green Street’s newly enhanced Health Index places the spotlight directly on factors that contribute to an asset’s income potential, lifting the fog to showcase retail occupier data in a different light. The Health Index is a proprietary quantitative evaluation of asset health and attractiveness, focussed on occupier fundamentals such as vacancy, demographics, competition, anchor store presence, and consumer dwell time. The objective is to capture the key benefits both retailers and centre landlords enjoy at a physical location, collectively assessing the strength, resilience, and revenue generating abilities of the asset in question.

High Health Index rankings indicate where a retailer should be able to generate the highest revenues and where a landlord should be able to maximise income potential.

It also reflects the potential resilience of an asset in the case of an economic downturn, given the strength of its underlying fundamentals. Moreover, a historic time series of health index rankings detail the performance trajectory – and asset management effectiveness – of any specific asset.  

What is the Health Index? 

The Health Index ranks approximately 3,200 retail locations across the U.K., evaluating each asset on ten factors (Exhibit 1) to produce a normalised z-score out of 100. The ranking compares each asset's performance within its sub-asset class (shopping centres, retail parks, high streets, outlet centres). In addition, it enables comparability between property sub-asset types, with a final score out of 100 for all ~3,200 assets. Weightings were established through numerous sources, including discussions with retail owners and managers during our recently completed ~150 U.K. retail asset tours. Moreover, actual retailer sales data were used to corroborate the rankings output of the index.

How to Interpret the Health Index 

The Green Street principle “to be approximately correct, than precisely wrong” is central to interpreting the Health Index. The Health Index provides a clear assessment of the health and attractiveness of each asset both within and across sub-asset classes, but interpreting the rankings requires an understanding of the makeup of the final score – with specifics available on the Retail Pro platform. For those looking within a single category, one of the best ways to use the index is to analyse the rankings within that sub-asset category.

Assets can be generally arranged into four possible groups, based on scoring for Asset-level and Macro factors:

1. Strong Macro, Strong Asset-level – strong underlying demographic fundamentals and well managed
2. Weak Macro, Strong Asset-level – well managed asset despite having weaker underlying demographics.
3. Strong Macro, Weak Asset-level – strong underlying demographic fundamentals but sub-optimal management.
4. Weak Macro, Weak Asset-level – sub-optimal management and weak demographic fundamentals.

If an asset scores poorly due to asset-level factors, despite having strong macro factors, this could suggest significant asset-management opportunities to maximise rental income potential, generating sizeable risk-adjusted unlevered returns.

Health Index Results

The top U.K. assets within each sub-asset class are catchment-dominant destination centres and have a nationwide reach, with far larger catchment populations than their peers. Low overall as well as persistent vacancy rates suggest rental tension is likely prevalent at these assets – boding well for income growth prospects and investment liquidity. Shopping centres dominate the top 20 U.K. assets with eleven entries - characterised either as city-centre hubs or out-of-town destinations. Meanwhile, five central London high streets are within the top 20, reflecting their prime locations, unmatched foot traffic, and a concentration of flagship stores that attract international tourists and affluent locals alike. Retail parks (two of the top 20) benefit a highly functional operating model, with two-thirds of the ~1,400 U.K. retail parks having zero vacancy.

The Health Index provides ample firepower to embark on several research projects going forward, focusing on a variety of topics, some of which will be explored by Green Street’s research team in due course. These will include (i) outlining index score differences across the retail REIT portfolios under coverage in the U.K., (ii) identifying individual assets that punch above their Health Index score and what lessons can be learned from owners’ asset management initiatives, and (iii) highlighting over-retailed locations that investors would be best to avoid. In the meantime, investors can use the Health Index and the detailed information on the Retail Pro platform to deepen their analysis of assets and markets and help identify properties with the greatest potential for long-term value creation.

Learn more about Green Street's new Retail Analytics Pro