Doom and gloom stories and statistics are becoming all too familiar for the retail sector. Customer spend may have gone up, but so have costs. Investment may be booming, but yields are now compressed to diamond-like hardness with no sign of rent increases being possible in the immediate future. And footfall is, well, falling.
But it is not all bad news. In fact, in some areas the green shoots of recovery are looking positively lush.
First and foremost, the investment market is doing better than ever, as yields harden and supply falls well behind demand.
Demand for prime assets across retail is at an “unprecedented level”, according to Colliers International head of retail investment James Watson.
More than £10bn poured into UK retail property investment in 2013. High street retail, which saw around £600m of investment in 2012, attracted £1.84bn last year.
Supermarkets also attracted £1.8bn, up from £1.2bn the year before, while retail warehouses made up £2.5bn, up from just £1.5bn. The lion’s share, however, was for shopping centres, attracting £4.25bn – a whopping 65% increase on 2012.
“This buying remains focused predominantly on prime assets, but the new supply of debt means some secondary assets are also attracting buyers who are prepared to go up the risk curve and take on active asset management,” says Watson.
Recently, loosened debt financing along with yet more money coming in from overseas investors resulted in dramatic yield compression in Q4 2013, and this has continued into 2014.
Meanwhile, high street prime assets are being almost exclusively bought by UK institutions and a few high-net-worth individuals.
Thanks to them, in 2013 the weighted average yield improved from 6.3% to 5.6% for high street shops. So far for 2014 the weighted average yield is 4.9%, with £635m already spent, with the focus on affluent cathedral cities and market towns, notably Lincoln and Chichester, which achieved yields of 4.5%.
In London, prime yields are below even that, at between 3.7 and 4%.
And rents, at last, are starting to come back from the recessional precipice.
In the past year prime retail rents across the UK rose by 1.9%. “A sure sign that things are getting better for retail,” says Mark Phillipson, head of retail at Colliers International.
Colliers analysed rents for more than 400 locations across the UK. “The number of centres with falling rents declined to 21% – a figure not bettered since 2008.”
The London retail market is very much the driving force behind this. Five of the top six performing locations were in central London, where average prime rents rose by 11.6%.
Alongside that, vacancy levels are falling. Outside central London 15% of shops are empty, down from a 16.3% peak in October 2012.
“We expect the steady absorption of existing space to drive a modest acceleration in rental growth from next year onwards,” says Phillipson, predicting a rise of 1.9% in retail warehouses, 1.4% in shopping centres and 1.3% in shops outside central London.
But don’t go breaking out the champagne just yet. Rents may have risen, but they are still, on average, 12% lower than they were before the recession.
Retail Parks
For one sector, the development pipeline seems to have been switched off at source.
Retail parks are at an all-time low. According to CBRE, the total pipeline amounts to little over 16m sq ft, with just over 10.5m sq ft consented. Both figures are the lowest in more than 20 years.
Construction activity is also well below that of the 1990s downturn, with just 1m sq ft under construction. At the same point after the 1990s recession, construction levels were three times higher.
“Grocery markets are the only retail area where development activity remains buoyant,” says Mark Teale, CBRE’s head of retail research.
Meanwhile, many of the first retail parks are beginning to look tired, with many no longer fit for purpose – hardly surprising as they date back to the early 1980s.
In terms of investment, however, retail parks are more healthy. Last year more than £2.5bn of retail warehouses were bought, a marked increase on 2012’s £1.5bn and 2011’s £2.1bn, but still some way off the heyday of the mid-2000s when the market reached around £4.5bn pa. This trend in renewed investor activity has continued through 2014, with some £580m having changed hands so far and an additional £250m or so under offer.
Prime shopping parks are offering yields as low as 4.5%, as opposed to 5.2% for the same period in 2013. And prime “bulky goods” parks have also experienced some contraction, to 5.7% down from 6.5%.
Out-of-town retail parks are also doing well in terms of footfall, bucking the downward trend and showing a 2.5% increase over the past year, according to the British Retail Consortium.
Fewer shops, Better shops
One thing we will all have to get used to is the fact that the number of shops is declining. But what impact will that have on developers?
The Centre for Retail Research last year forecast that by 2018 total store numbers will fall by 22%, to just 220,000.
In part this is to do with online sales rising to make up 21.5% of the market, against 12.7% last year. Partly it is the predicted 164 major or medium-sized administrations. Mainly it is the fact that footfall on the high street has dropped exponentially over the past few years, and by 1.7% in June and July this year alone.
While consumer spending has increased by 12% since 2006, this has been outstripped by operating costs, which have risen by 20%.
“It is easy to be negative about the UK retail property sector,” says Chris Geaves, chief executive of Sovereign Land. “We are constantly reminded that the emergence of internet shopping has left us with too much retail space.
“I don’t dispute that. Overall, there is an oversupply of retail space. But you don’t have to dig too far beneath the surface to discover that there is, in fact, an undersupply of the right type of retail space.”
For Geaves and Land Securities head of retail development, Lester Hampson, the “right kind of retail space” means enhanced, better shopping centres.
“Shopping centres are not dead, they are simply evolving,” says Lester Hampson, head of retail development at Land Securities.
“Physical interaction is an intrinsic part of what it means to be human. That, in my view, makes the future of shopping centres secure, so long as they evolve to become truly social destinations, as well as maintaining and satisfying our simplest shopping needs.”
Geaves argues, like LandSec’s Hampson, that this is the silver lining. “Retail space has to be suitable for today’s consumer and that provides the savvy retail property company with a huge opportunity. There is a need for new shopping centres to be redeveloped to make shopping a more interesting and captivating experience.”
Supermarkets and convenience retail
The UK supermarket landscape is changing radically as discounters move in to seize market share from the likes of Tesco, Morrisons, Asda and Sainsbury’s.
Aldi’s recent figures show it has already overtaken Waitrose in terms of sales and it is tipped to become one of the UKs top four supermarket chains in the next year.
In order to compete, traditional grocers are starting to look at how they can cut costs and court custom.
“For supermarkets, the space race is over,” says Steve Rodell, head of retail at Christie + Co. He predicts the convenience store market will become the next blood-filled arena. “They increasingly understand that small format is the future, and it is where customers are spending more and more.”
Because of this, investment in convenience retailing is growing. Asda, for instance, is hoping to exponentially expand into petrol station forecourt premises.
“Our experience is that private investors and family trusts are increasingly looking into the c-store space, both traditional independent and symbol-backed, as well as small format supermarkets,” says Rodell.
Which all looks good for the benighted Co-op. While the rest of its operations have been hit hard by scandal and a lack of profitability, the Co-operative Group’s convenience stores are going from strength to strength. “There is a common misconception about the Co-operative convenience-stores,” says Rodell. “Because of this, investors looking into the c-store space are undervaluing Co-op food operations that come onto the market.”
Even so, supermarkets are still doing just fine in terms of real estate fundamentals. Over the past 10 years supermarkets have recorded value increases of 5.6% year-on-year, while standard retail has experienced annual capital growth of just 0.5%. And in 2013, more than £1.8bn of stock was traded at an overall average net initial yield of 4.7%, down from 4.9% in 2012. For the prime end of the market yields compressed to 4.4%.
London
The retail pipeline may only be producing a trickle in the rest of the country, but London is preparing for a flood.
An engine for growth is Crossrail and its associated redevelopments. According to Knight Frank, the retail pipeline around Crossrail’s seven central London stations is on its own 2.3m sq ft.
A further 450,000 sq ft is expected on Oxford Street by 2018. Canary Wharf has 160,000 sq ft of shops under way, while Shoreditch (which has original retailers such as Boxpark) has 120,000 sq ft of shops in the pipeline and a further 250,000 sq ft at the pre-planning stage.
Ian Barbour, head of retail leasing at Knight Frank, says: “These pipeline developments will provide space which meets users’ optimum size criteria. This is likely to strengthen the attraction of the core development hubs around Tottenham Court Road/eastern Oxford Street and Canary Wharf/Wood Wharf.”
In terms of rents and investment, central London prime retail remains
“a market apart”. Average prime rents for central London rose by 11.6%. Yields on Bond Street, meanwhile, have fallen below 3% – a testament to the super-rents paid by international luxury brands to secure their toehold on one of the world’s most important shopping streets and “the equally stratospheric prices that investors will pay to lock-in to these assets”, says Colliers retail investment head James Watson.
“The London super prime retail market remains on the verge of boiling point,” adds Adrian Leavey, commercial property partner at law firm Trowers & Hamlins. “There is a lot of heat, but central London is still where the top retailers want to be.”
Shopping centre development
Construction of shopping centres since 2007 so far appears to be following the same trajectory as after the 1990s downturn.
But when you strip London out of the equation the picture begins to look less healthy. “In fact, development activity remains at a recessionary low,” says CBRE head of retail research Mark Teale.
Even though the UK’s economy is doing comparatively well, it will be a long time before this is factored into the pipeline.
“The impact of economic trends on shop supply is so lagged that even if a sustained consumer boom were to set in tomorrow it would still be 18 months to two years before shopping centre pipeline levels began to lift significantly,” says Teale.
Scheme proposals, usually a good early indicator of recovery, are still declining. In fact, they have halved since 2009, from 30m sq ft to just 15.5m sq ft. “And the proposal total is continuing to contract. Consent levels are also falling, and are currently 12% lower than at the end of 2011,” says Teale.
One statistic that does seem to show an improvement is construction activity, up to 5.3m sq ft in March from 3.6m sq ft a year before.
“The thing is it now takes just one or two medium-sized schemes for construction totals to seemingly soar,” says Teale. Over 50% of the 5.3m sq ft of shopping centre space nominally under construction in the first half of 2014 was from just four schemes: Bradford Broadway, Victoria Gate in Leeds and Battersea Power Station and King’s Cross in London.
