Norman Bowie
The retail scene is no exception to the quiet revolution which is occurring in the property market. Everyone is a shopper, but over-familiarisation can give a false impression of what is really happening. The streets are still thronged with people, it is not easy to find a parking space either with or without a yellow line. And yet much is happening and of great importance to the investor and developer.
The great attraction of the retail sector is that it is seldom long before an empty shop standing in an established position, whether tertiary or prime, finds a new occupier. There is always someone around who reckons that something can be sold to the public to earn a profit and to pay a rent, even though the latter may not be up to the landlord’s hopes.
Retail is defensive in bad times and reacts quickly to periods of prosperity and inflation. Prices of goods respond to changing market conditions and volume, variations in spending habits, and levels of personal incomes and savings. Recently, the growth in the use of the plastic card has been an added boost to sales. Shoppers have not been slow to respond to the personal loans dangled in front of them by the banks and credit houses: individual stores have established charge and credit cards, and now the building societies are getting into the act. Many cards offer a month’s free credit but, after that, the annualised interest charge is often only a little short of 30%.
Looking back, it seems curious that the majority of institutional investors did not go more heavily into the retail sector when they started to create and build up their portfolios in the 1960s. Certainly the few funds who were in property in the 1920s and 1930s never overlooked its great merits. It was probably the relatively low yields of 5% to 5 1/2% against offices at 6 1/2% which were off-putting. Those days also saw periodic credit squeezes and price controls. The mist over the sector has only cleared away in the last few years and its popularity has driven the yields down to around 4% for the favourites. A yield at these levels has only been seen for short periods in 1947-48 and 1973, and this break from the long-term trend line is a clear indication of a warning light — no market deviates for ever.
The size of the age groups in the population varies considerably, and as the troughs and peaks move through the life-cycle so also will the distribution of spending between the various classifications of goods and services move. It is a complex subject, however, and will vary from district to district, as the population mix is not consistent.
Rising standards of living have a disproportionate effect on the type of goods and services which people seek. The level of personal savings varies with the age groups and economic conditions, and a build-up or draw-down of savings has an early effect on retailers’ profits. The reported 7% increase in sales by volume for the year ended November 1986 shows that the greatest gain is in durables — a natural result of earnings rising faster than prices.
Significant changes
The last few years have witnessed significant changes in the retail scene. The arrival in force of the speciality shop, the build-up of out-of-town or edge-of-town retail warehouses, first in singles and now in clusters, followed by a plethora of proposals for greenfield shopping centres are all evidence of fundamental forces at work. Two of the main elements have been the ever-increasing numbers of car-borne shoppers and their increased spending power. A new breed of retailers is managing the large and small multiple chains while the fast-growing franchise system attracts customers seeking a personal service. The population continues to drift out of the large towns and migration into suburban and country districts continues.
The retailers and developers have responded to these shifts in the market by assessing the demand for new additional space and the up-dating of older buildings. It seems that plans exist to modernise almost every shopping centre of the 1960s to a standard to match the latest whims of fashion. It was thought that depreciation bypassed retail buildings, but that has proved to be untrue — although with high land values, the impact may be less.
The overall net increase in retail floorspace resulting from these efforts, which seems likely to be substantial, will mean a shift in values: an excess in any one area is bound to soften rental levels elsewhere. Existing High Streets with poor car parking facilities and accessibility will be particularly vulnerable and a question-mark may hover over regional centres as retail on the fringe develops a growing attraction for the city-dwellers.
The effect on secondary shopping could be different. Many of these units are moving into owner-occupation, and with the family living over the shop an early-morning and late-night service can be provided, particularly to nearby residents. The arrival of the charity shop has added to the demand for these locations, trading as they do in good-quality secondhand items at competitive prices.
Retail services continue to expand in both variety and number in spite of the shrinkage caused through the re-organisation of branch operations of the banks and building societies. These businesses, which compete for retail space in medium-to-high-rented pitches, currently have a planning hurdle to overcome, but some relaxation can be expected: the in-built resistance of vested interests to their introduction in shopping centres will not last forever. The consumer votes with his feet, spending power and choices, and, in the end, the consumer will win the day and dictate the locations sought by the retailers.
The consumer is gaining in influence as he becomes more mobile and concerned with ease of accessibility. Looming on the horizon is a demand for pleasant surroundings. Pedestrianisation with trees and seats has been a winner and new shopping centres are increasingly concentrating on the “quality of life”. Consumers are now demanding that extensive recreational facilities, both indoor and outdoor, should be readily available, and this mood will undoubtedly gain in strength.
In the past the retail sector has done the investor proud, particularly those who had a good nose for the opportunity — 7 1/2% yields in 1975, for example. The small and the larger funds have equally found profitable outlets for their money, from single units to entire shopping centres. To some, the low end of the yield spectrum looks expensive at around 4%, and they are sellers to those who hold the other view. Much of the money released is moving to retail warehouses where the yield of around 7 1/2% to 8 1/2% could well look cheap as demand strengthens both by tenants and investors.
The supply side for investors may well not match demand, and this will keep a downward pressure on yields. Some of the more active retailers have a fundamental approach to ownership retention and the use of property as a financial asset. There will still be occasional sale and leaseback deals by others as they raise initially cheap finance for further expansion or modernisation.
Retailers are well up with the electronic revolution: control of stock, orders, distribution, tills, and the use of credit cards are now closely checked and monitored. EFT-POS is undergoing trials and the banks have agreed to work together on the project, but the key to success is whether the consumer will accept the idea that his bank account is debited before he has got his purchases out of the shop.
The next stage, already available on a limited scale, is shopping at home in the armchair by the use of a keyboard and monitor. A home delivery service would bring the wheel full circle, from the time when tradesmen called at the door for orders and errand-boys on bicycles delivered the goods the same day. It may be a dream at the moment, but one not to be overlooked.
It is of interest to note that in the Financial Times All-share Index the “Stores” and “Property” sections have almost marched together since their common base date of April 1962. Starting at 100, the Stores in March 1987 were at 1015 and Property 872 (the all-time highs are 1016 and 882 attained in March and February respectively). This is an annual growth rate of just over 9% compared with inflation at about 1/2% less. As always, stock selection is of great importance if the average is to be bettered. Food retailing shares have soared at around 19% pa in 19 years, reflecting the arrival and growth of the supermarket — but not reflected in supermarket rents.
Retail has one advantage over the other property sectors in offering a wide geographical spread across the whole country, but it poses investors and their advisers alike with the problem of an equally broad spread of research into the basic factors and their trends influencing values.
The pace of change is unlikely to slow down, and the shrewd investor and developer will be wise to be well out in front to enjoy the benefit of initial lower rents, subsequent growth and higher returns. The edge-of-town and out-of-town centres should be a firm favourite provided car parking is really generous to cope with the growing mobility of shoppers. Associated landscaping and leisure facilities alongside will be a bonus factor.
The favoured market towns with adequate car parking and ease of movement will remain attractive, but a weather eye needs to be kept for the first signs of any relaxation in the operation of planning controls on their fringes. Towns and High Streets which become congested and jammed with traffic will frighten the shopper away so that accessibility will be increasingly important.
The feast and famine property cycle equally applies to retail. The many new schemes and projects being implemented and planned indicate that a shift in values and rental growth is likely to occur in many areas. Towns and locations dependent on one dominant industry can boom and slump, so that, accordingly, there are times to buy and times to sell.
The proposed rating revaluation in 1990 could have some adverse effect in those areas where there has been an above-average growth in rental values. It is impossible to quantify the effect, but it is just one further factor for the thoughtful investor to ponder.
It should always be remembered that it is the consumer who is the paramount factor in determining values and their pace of change. The consumer makes the market, and it is equally important to remember that the market is a democracy.
