by Tim Horsey
In 1987 the retail sector was not the worst performing for institutional property holders, just the least good. Total return at 17.6% for retail properties owned by funds in the IPD was lower than that achieved by industrials (19.2%) and offices (28.9%). The return realised during the year was, however, higher than the sector had reached in any previous year since 1981, and helped to maintain its position as easily the most profitable sector in the long term; the annualised total return for retails from 1980 to 1987 was 13.5% as against 11.1% for offices and 8.5% for industrials.
The overall retail return has exceeded 10% in every year this decade and appears less volatile than those experienced in other sectors. In 1987 rental value grew by 19.8%, much the highest rate of appreciation of the decade, and some 10% above the level of the previous year. Income return stood at 5.7%, slightly higher than in 1986. The first half of this year has seen continued growth of rents and values, perhaps even more rapidly than in 1987, and it would require a slump of epic proportions to bring total returns for the year down below 15%.
The retail boom has been fuelled by consumer insatiability and retailer insecurity. Consumption demand has burgeoned with rising real incomes, increased opportunities for borrowing and reduced saving; spending in real terms rose by 6% in 1986 and 5.2% in 1987, according to business forecasters Staniland Hall Associates. The powerful multiples largely abandoned the merger/takeover mania of the previous year, and turned their aggression towards acquiring scarce prime units, particularly in the newer shopping centres.
London was the most successful region for retail property during 1987, the West End realising a total return of 25% and the suburbs 26%. Other strong areas were the Midlands and East Anglia (20%) and the South East (19%); the popular conception of the North-South divide seems to be vindicated as Scotland (total return 6%) and the North (10%) markedly underperformed the nation’s retails as a whole. Rental growth has, however been proceeding apace in the UK. Northern Ireland led the way in 1987 with 28.9%, and every region showed an increase of more than 16%: London, the South East and the North all recorded figures above 20%.
The performance of all types of standard retail property has been quite consistent over a longish time period. Non-prime shops have shown marginally the highest total return since 1980, but the range between all High Street and shopping centre returns is small. Retail warehouses lag rather behind other retail returns. In 1987 large shopping centres valued at over £10m achieved the highest return (21.5%). Non-High Street town-centre retails continue to perform well, largely reflecting the extension of prime areas within towns as independent retailers have been forced away from their traditional pitch by the prohibitively high rents paid by large retail groups. Multiples have become more discriminating in their choice of prime units, demanding larger floorspace, preferably in excess of 2,500 sq ft, good location relative to other retailers (both complementary and competing businesses), and favourable access, particularly in terms of road communications and parking facilities. There is still strong demand for new and refurbished units.
Retail property was the only sector which attracted positive net investment by IPD institutions in 1987; £280m was ploughed in, while offices and industrials experienced net withdrawals of £80m and £15m respectively. Retail investments account for approximately 35% of all institutional assets in the databank, with some 45% held in shopping centres and 35% in traditional units. Retail warehouses account for a small 4%.
Funds have tended to prefer in-town shopping centres to out-of-town, with the one (big) exception of Metro Centre. Out-of-town has been viewed as the high-risk area of the market, not only in terms of potential profitability but also in terms of its effect on retail investments in total; such creations are very much boom-babies, conceived by developers in the fertile period of rapidly rising rents and expansive demand.
Retail warehouses in the IPD have not performed as well as shop property in general, either in 1987 or over the decade, and the 25 retail parks opened in 1987 failed to attract a great deal of interest among funds in the databank, even though they accounted for 77% of out-of-town floorspace opened during the year. These developments are intended to attract quality multiples formerly restricted to the High Street (eg Boots, Habitat), but the investment case for them is as yet largely unproven; much depends on how such outlets perform over a period of two or three years, and also what planning policies are pursued by central and local government in the longer term.
The response of institutions to the threat to the High Street has been to maintain their commitment to in-town; the largest centres at present under construction are the Sun Alliance Mars 1 development at Watford and Norwich Union’s Bentalls project at Kingston upon Thames, both of which incorporate more than 500,000 sq ft. Town-centre construction projects exceed out-of-town in space terms, although out-of-town ventures predominate at the planning stage.
Funds and their advisers are becoming increasingly vocal in calling for a stricter planning regime from central government, and in so doing self-interest and the public good may both be well served. If local authorities believe out-of-town development to be inevitable they will compete to entice projects away from their neighbours, even if existing town-centre facilities are satisfactory and even if the plans are environmentally undesirable. Experience in the USA, France and West Germany has shown that such developments are likely to be deleterious for existing town centres, further exacerbating the polarisation within the shopping community between the more wealthy and mobile, and those more dependent on public transport and local shopping facilities.
Institutions have shown interest in developing speciality shopping centres and arcades, while also selling some of the more outdated centres to developers who intend to rejuvenate their image. If they can provide satisfactory parking facilities and encourage local authorities to provide good infrastructure, both in terms of roads and public transport, then the High Street should have more than a fighting chance to maintain its supremacy.
Clouds are gathering on the retail horizon, and over-capacity must be a real fear for all involved with retail property, even if the more pessimistic of current predictions do not materialise. In June it was claimed that multiples were finding difficulty in making new branches at top rents pay, though retail sales figures for July were a massive 2 percentage points up on the previous month. Greatest worries must attach to the balance of payments situation and the Chancellor’s policy of interest rate increases which will reduce demand later if not sooner. Spending is predicted to have risen by 4.7% during the whole of 1988, and to increase by only 1.4% in real terms next year. Further ahead, the rate revaluation of 1990 seems likely to bring rises averaging 30% for most retail multiples and reaching 50% for some groups, though such hikes may be phased in over a number of years.
Next year will almost certainly witness a retrenchment after the boom conditions in 1987 and 1988, though institutions will probably continue to pursue the justifiable theory that retails represent the safest sector for investment property.