Retail market update Q1 2022
With so many bad news headlines over the cost-of-living crisis and geopolitical uncertainty, it is no surprise that consumer confidence has faltered and dramatically so.
Consumer confidence has plummeted
The GfK consumer index on its April reading is akin to levels seen in the early 1990s economic downturn and for the Global Financial Crisis. At the moment the overall rate of GDP is forecast to slow but technically not enter a recession, for the consumer related parts of the economy the impact is going to be more significant than that.
Summer a cushion to a winter crisis
Heading into summer months consumers somewhat protected from the full blow of higher energy prices. There is concern at the level of further increase in the October energy price cap (some commentators are suggesting +47%) which will come at a time when winter puts further emphasis on energy costs. Estimates are that 40% of households will be in fuel poverty (spending more than 10% of their income on energy). In this environment consumers will be diverting their spending power away from more discretionary spend.
Is the retail recovery over before it even got going?
As pandemic restrictions eased life began to return to UK retail with initial earnest, but the faltering which began in the second half of 2021 has continued into 2022. Leasing activity isn’t far shy of the nadir of Q2 2020 and net absorption is back in the negative after turning positive in the previous quarter. The reasons why are not hard to grasp, given wider economic news. The downward trend in retail parks lettings well pre-dates the pandemic, falling since a peak in leasing activity in 2017. The trend in general retail leasing has been more routed in the covid lockdowns.
Vacancy rates high
Data from the British Retail Consortium suggests that empty shops in town centres and shopping centres is now at around 14%. This has improved marginally from the worst through the pandemic but still stands above the pre-pandemic rate of around 12%.
Retail shake-up
The fall into administration and subsequent rescue of McColls does prove some caution that a more general shake-up – and possibly a shake-out – of retail remains a real possibility. There is anecdotal evidence that some independent retailers are, after a couple of traumatic years, opting for retirement as opportunities to exit or assign lease arise. But in a period of conflicting signals there are signs of competition among fashion retailers. Tentative signs of competition in some segments has not yet shown through in overall leasing activity or indeed rental growth, which remains stubbornly negative (annual rental growth for standard retail was -7.5% to end Q1 2022, -2.7% for shopping centres and just positive, 0.2% for retail warehouses).
Investment very erratic
Investment transactions have been very erratic, with both sales volumes and number of transactions vary significantly from quarter to quarter. This, again, reflects the uncertainty that is very much the environment, rather than merely some wild cards. Portfolio managers need to take on board the risk for the sector, the widening yield spread between retail and other property classes and assess what the latest blow to the economy means for the sector.
Despite this backdrop and the often-thin transaction evidence on which to benchmark the performance of the sector, yields in some segments of the market have improved beyond their pre-pandemic level. The worst of the re-rating through the pandemic was for the shopping centre market, here yields at their highest reached 9.0% from a pre-covid 7.2%, now almost back to that level at 7.4%. Retail warehouse didn’t suffer as worse a re-rating but have still improved – with investors buoyed by the potential alternative uses for the sector. The current retail warehouse yield is 5.7% – in fact the best since 2017. And lastly, literally, the high street which hasn’t seen any improvement yet and yields remain significantly above their pre-covid level (currently 7.2% versus a pre-covid 5.7% in March-2020).
Shopping centres
Shopping centres are perhaps the most enigmatic part of the retail mix. On the one hand is the view that they are the most challenging subsector. On the other is the experience of the Metrocentre on Tyneside, where Sovereign Centros came is as asset manager after the collapse of Intu. They adopted a highly active approach and invested £60m to create a ‘new dawn’ for the iconic mall and its retail park. This may be the clue: right now, retail may not be the place for investor who don’t like to get their hands dirty.
| Retail: Data to end Q1 2022 | High Street retail / general retail | Retail warehouse / retail park |
|---|---|---|
| Current quarter (last quarter / 5yr ave) | Current quarter (last quarter / 5yr ave) | |
| Occupier | ||
| Availability rate %* | 3.5% (3.7%,4.0%) | 3.7% (4.2%,3.7%) |
| Vacancy rate %* | 2.5% (2.5%, 2.3%) | 3.1% (2.8%, 2.4%) |
| Qly take up (sqft) | 2.5m sq ft (3.5m sqft, 4.2m sqft | 409,000sq ft (488,000, 721,000) |
| Rental growth (12-month rate) % | -7.5% (-9.3%, -5.7%) | 0.2% (-0.8%, -2.6%) |
| Supply | ||
| Completions (net delivered m sqft) | 638,000 sq ft (1.2m, 1,85m) | 46,600- (-, 160,000) |
| Total under construction (sqft) | 6.2m sqft (6.2m sqft, 8.1m sqft) | 430,000sqft (418,000sq ft, 598,000sqft) |
| Investment | ||
| Qly sales volume (£) | £1,317m (£1,309m, £1,617m) | £907m (£601m, £426m) |
| Average initial yield % | 7.2% (7.2%, 5.9%) | 5.7% (6.2%, 6.4%) |
| Prime yield % | 6.0-6.25% (city/major regional) | 5.0% |
* More indicative of trend than absolute level.
Retail: key investment transactions
| Address | Location | Building size sqft (sub-sector) | Sale Price (£m) | Net Initial Yield | Buyer |
|---|---|---|---|---|---|
| UK Retail & Office | Portfolio | 200,000 (Supermarket/off) | £73m | 5.4% | LXi REIT Plc |
| Inglis Green Road | Edinburgh | 86,000 (Supermarket) | £32.2m | 4.6% | Urbium Capital Partners |
| Victoria Gate & Quarter | Leeds | 614,000 (Shopping centre) | £120m | 7.4% | Redical Holdings |
| Central Retail Park | Havant | – (Retail warehouse) | £28m | 5.1% | – |
For the retail sector healthy caution is the prudent choice
While retail may have been heading, if not entirely in the right direction, then at least to safer waters it is important to grasp that these waters are for the most part the return to pre-Covid levels and nothing more. Now looking ahead comes the next challenge with faltering consumer confidence, likely falls in retail sales and squeezed margins as inflation and supply chain issues bite – matched against no long queues of potential occupiers – the outlook for rents is likely tepid at best and investor caution could well be evident.