UK Retail Market Review Q3 2020

2020 has been a difficult year for bricks and mortar retail

It is a commonly repeated aphorism but nonetheless true that the pandemic together with Lockdown 1.0 and 2.0 have crammed five or more years of anticipated changes in markets into the last nine months. Internet retailing already accounted for 19% of retail sales in February. Lockdown 1.0 and the closure of all non-essential retail premises caused internet sales to climb to 33% of total retail sales in May. These changes to the pattern of consumer expenditure, and the associated collapse in footfall along UK high streets, is behind traditional retail’s current financial distress. Retail business failures and reduced occupier demand for retail property has effectively reduced achievable rents and property valuations—consequently specialist retail funds and general investment funds with a traditional market weighted exposure to retail have underperformed.

Were there any ‘winners’ in the retail sector this year?

Not all segments of retail have been impacted equally negatively—it is worth noting that one of the best performing strategies across all market segments during 2020 was long lease shops. Moreover, in Q3, prime Retail Parks matched the MSCI All Property Index total return of 0.1% for the first time in six years. Fear of crowds and infection may drive consumers back into their cars and towards retail parks with wider open spaces and plentiful car parking. British Land recently said that their Retail Park portfolio had demonstrated resilience to Covid-19. Next said that, “Retail Parks where customers can park and walk straight into relatively spacious stores have performed much better.” The ability of retail parks to be re-purposed as in-demand last mile logistics space could also drive their performance.

How high is availability of retail space across the UK?

In the past 12 months availability of retail space has increased by 26% in central London, 20% in key centres across the South East and almost 30% in key centres across the rest of the UK. Increases in availability have not been uniform across all geographies. There has been a wave of shop closures on London’s Oxford Street—and the availability rate in Westminster has not been higher in the last 10 years. In contrast, availability of retail space in Oxford and Milton Keynes has been relatively limited, with supply in the latter 65% down on the 10-year average. For those wishing to invest in retail real estate, local supply/demand dynamics, development pipelines and resident-demographics—such as unemployment and income growth—will be closely monitored for signs of possible longer-term resilience.

How active has the leasing market been?

Declining take-up has been a feature of the London retail market for the past 10 years. This is despite the capital’s position as a Global City and its undoubted success in attracting overseas retail businesses and tourists. 2020 saw a dramatic acceleration of that downward trend with take-up of retail space almost 50% down on 2019 levels. Despite its relatively prosperous economy, take-up in the South East was down almost 40% on last year—and in the key centres across the rest of the UK take-up dropped by 12%.

The amount of space leased at Retail Warehouses in the UK between March and October 2020 was almost 70% down on the 10-year quarterly average. Demand for Shopping Centre space was even weaker—down more than 90% on the 10-year average.

What is happening to rental levels for retail space?

Retail business failures and reduced occupier demand for high street and retail property generally has effectively reduced achievable rents. London West End rental values have been in decline throughout 2020. In the nine months to the end of September 2020 Mayfair rents were down 6% and more ‘edgy’ and eclectic markets including Camden (-3%) and Islington (-1%) fared a little better. South East rental values have experienced similar falls to prime central London, declining by 7% since the start of 2020. The key centres of Brighton, Guildford and Oxford have experienced rental declines upward of 7% and MSCI data does not highlight any South East key centre that has bucked this downward trend. In the rest of the UK rental values have fallen by 6% since the start of the year. In town shopping centre rental values have decreased by 10% and out of town shopping centre rental values have fallen 15%. Retail Warehouses have fared slightly better with declines of 7%.

How have investment volumes and capital values been impacted?

In the past 12 months investment into retail real estate amounted to £2.2 billion and had decreased almost 40% from £3.5 billion recorded over the same period last year. In both Q2 and Q3 this year no transactions were recorded in central London—presumably because investors decided the outlook for retail was too uncertain.

In the past 12 months, retail capital values have fallen by 10% in Mayfair, 12% in Covent Garden, 6% in Islington and 15% in Camden. Capital values in all regional key centres monitored by MSCI—including Birmingham, Bristol, Leeds, Liverpool, Manchester, Newcastle and Nottingham—fell by between 15% and 20%. In October, Chanel acquired the freehold interest in its own flagship store on New Bond Street. The asking price was £240 million but keen interest in the asset and some competitive bidding drove the price up to £310 million off a yield of 2.5%. Despite the current economic and political environment there quite obviously remains appetite for super-prime trophy assets which are only rarely available.

Read more in our quarterly review here