Retail capital values over the last three months have grown by 3.2% (the strongest quarterly rate since 2010) with values stabilising across all retail segments.
Consumer confidence falters from its upward trajectory
It was always likely, emerging from the pandemic lockdowns, that retail and consumer confidence would have an uneven recovery. Last quarter consumer confidence was running high, but this quarter consumer confidence has felt the hit of fuel and food shortages alongside rising prices, and the looming spectre of rising interest rates, all these factors are squeezing household budgets. Rising Covid rates will also have played a role in denting consumer confidence. Faltering confidence is apparent in the latest retail sales data; with five consecutive months of declines.
Against this faltering trajectory there is the unwinding of Covid savings accrued through the pandemic. Household savings rates jumped to 22.5% in mid-2020 but this ratio is now back to 11.3% almost in line with its long-term average of 8.0%.
Household savings ratio
Source: Cluttons, ONS
Internet sales found a new normal level
Prior to the pandemic online retail accounted for 20% of retail sales, this shifted dramatically through the pandemic, but over the last few months it seems to be stabilising at a new normal rate of close to 25%.
Internet sales as a proportion of total retail sales (%)
Source: Cluttons, ONS
Rental values are a margin below last’s years levels
Compared to average trends across all commercial real estate, retail rental trends are weaker. Over the year to end September 2021 All Property rents have been largely stable (+0.6%). The weakest retail segment has been high street shops where rents have fallen -11.0%, worse in central London where rents have fallen -13.2%. The better performing segments have been retail warehouses and supermarkets, although rents have still slipped by -2.3% and -0.2% respectively. And whilst rents have still fallen over the last three months the rate has lessened, adding to the evidence that the retail market has found its floor. Over the quarter alone high street retail rents fell just -1.2%, retail warehouses -0.2% and supermarkets -0.6%.
Retail sector capital values are stabilising
Capital values are stabilising across all segments of the retail market with only marginal evidence of further decline from shopping centres (-0.5%) and standard retail (-1.5%) in the three months to end September 2021.
Most notable has been the improvement in retail warehouse values which have risen 5.8% with investor interest driving yields lower. This is the strongest growth rate since 2010. Supermarket values are also rising; up 2.3% in the three months to end September. There will continue to be regional variance: some locations are emerging as resilient high streets and data is slowly emerging to support this.
Retail capital values
Source: Cluttons, MSCI
As the economy recovers from the pandemic, there will be upward and downward swings in sentiment. There was a strong lift to mid-year and since then a few indicators have slipped sideways, largely the result of supply chain issues, emerging inflation and expected interest rate rises.
The retail sector was hit hardest through the pandemic but now there is mounting evidence across retail segments of values stabilising. For retail warehouses the bounce back has been most significant. Prime yields for the sector now stand close to 6.0% compared to 7.25% a year ago. This improvement has been driven by the servicing of ‘click & collect’ orders, many consumers favouring this retail format with ample opportunity for social distancing and also investors pricing in redevelopment potential (either distribution or residential).