Industry confidence continues to contrast sharply between London and the regions: delight on one hand and despair on the other. So when is it all going to change?
Now we are moving into the second quarter of the year, Estates Gazette gauges sentiment in the industry through three people who have their fingers firmly on the pulse. Their views are not entirely optimistic, but each does see room for positive change, despite the challenges.
The panel:
Chaired by Damian Wild, editor, Estates Gazette
SR Simon Rubinsohn, chief economist, RICS
PT Phil Tily, managing director, IPD
NS Nick Symons, partner, MMX Retail
How does the economy look to you for the rest of the year?
SR: Not an awful lot better than 2012 in terms of economic numbers. The government is still committed to austerity so the impact on the economy will largely depend on whether or not the private sector can step up and make good the losses from the public sector.
We are still probably looking at growth net over the course of this year, somewhere between 0.75% and 1.25% – better than last year.
PT: We had returns on individual balanced portfolios as low as -15% to -20% last year, so there were funders taking some hefty write-downs. But long-income funds are delivering relatively robust 8% returns, so there is a varied picture out there.
Is retail in as much distress as it looks?
NS: The loss of such companies as HMV and Jessops always makes people nervous. But we are getting positive numbers back as well. There is an increasing gap between those that have really got to grips with the retail world today and those that have got a legacy of old portfolios, too many stores and over-rented stock, and that is causing them problems.
If you look at some of the really strong retail shopping centres and retail destinations: Regent Street in central London or the big super-regional malls, they are trading really well, they have a robust strategy in place, they have got owners who know what they are doing.
But then at the opposite end of the spectrum you have still got the really poor secondary kit that is almost being renamed as tertiary now. It is debt-laden and difficult to manage without a huge drop in values and a huge burden on landlords and occupiers with rates. Sadly, the bottom end of the market will continue to decline.
Is retail sentiment shifting?
NS: At the low point in 2012, retailers understood what was going on. Now I think they are beginning to move forward again with something of an air of optimism. At least they are putting structures in place to get to grips with the situation.
PT: The thing that concerns me when you look at the numbers across the investment portfolios we measure is that the average fund has a 50% weighting in the retail market, and there is a degree of consolidation in the retail space. With a 50% allocation to retail, that obviously presents some strategic challenges.
Is the retail sector going to be a drag in terms of GDP or support a modest growth?
SR: The fundamental point is wages are growing by somewhere between 1% and 1.5% – and a little more if you throw in bonuses. Inflation is running at somewhere between 2.5% and 3%.
That is a very simplistic way to look at real incomes, but it gives you a pattern. It implies that it is not going to be easy for consumers this year. It wasn’t last year. There will be increases in consumer spending and inevitably that will translate to a decent enough picture in the stronger areas.
But the overall story is relatively challenging, simply because there isn’t that sort of power behind income gains to spread down to less-favoured places.
Sporting success improved sentiment last year. What have we got this year?
SR: Tensions in Europe seem to be easing, so risk appetite has improved. That is positive for our markets and consumers, because borrowing rates reflect that and we have seen mortgage rates come down.
The housing market also looks firmer. This extends a bit beyond London, too. Let’s also remember the employment data, for whatever reason, is holding up, too. It’s proving resilient.
So, one might have expected many fewer people to be in work, given the economic picture, but that isn’t the case.
Industrial is being fuelled by retailers in many sectors, so does the positivity around retail affect other sectors?
NS: It does. Obviously, the logistics side is crucial, such as next-day delivery and web-based sales. The logistics side of that is huge to retailers. Things like John Lewis’ click-and-collect, where you can also pick up your goods from Waitrose, all feed into their logistics lines. So yes, it does have a big impact.
How is industrial performing? Is it regionalised like offices and retail?
PT: There is a South/rest-of-the-country divide, but it is more about variation by type.
The manufacturing side of the industrial market is more linked in with the challenges across the eurozone, so there have been performance setbacks for the manufacturing sector over the past year.
The distribution side, however, has held up relatively well because of the increased demand for service on live sales.
There is less of a regional variation there than there is in the office market.
In offices, you get significant write-downs outside the South East, but you also get negative rates of return in the South East.
That is a worry because London is performing exceptionally well. London is profiting to the detriment of that South East market – it is taking tenant pull away from there, which has possibly left it with those negative trends.
Is there a strong argument for London being the retail capital of the world?
SR: Yes. London still stands out as a huge attraction for a lot of investors. All the evidence of activity and feedback from RICS members – in residential as well – shows that London’s markets are holding up and there is no sign of withering.
Are you more or less optimistic about 2013 than 2012?
PT: Marginally more optimistic. We have more stability in the marketplace and that is winning admirers from a wider pool of investors – rightly so.
SR: I don’t think the conditions are in place for a worse outcome.
