Retail market update Q3 2022

This sector was hit hardest by Covid and the cost-of-living-led recession will likely deliver another blow.

The Elizabeth Line is providing a bright spot. Parts of London had a strong October half-term in footfall numbers, with the recent opening of the Elizabeth Line providing a boost. Although this is not yet evident in travel statistics, footfall numbers were much improved. Remembering that only this time last year (November 2021) the country was facing the worrying prospect of a new covid variant, which really dented pre-Christmas trading.

Whilst half-term was busier, and Oxford Street felt the benefit of the Elizabeth line, there is no doubting continued lower footfall numbers as a norm alongside lower transport statistics for London too. The New West End Company suggests footfall on their turf remains at 20% below pre-covid. So too the transport numbers reported by TFL. Highlighting the direct impact of hybrid working on London retail locations.

But consumer confidence remains exceptionally low. After hitting a historic low in September, October showed no real improvement, with the GfK consumer confidence score increasing just 2 points to -47. With the prospect of higher interest rates, sustained high levels of inflation, and a potential return of austerity alongside high energy costs to boot, consumers are faced with a picture of uncertainty and anxiety. In this economic context, it is hard to foresee any improvement in consumer spending to bring relief to the struggling retail sector – except, perhaps, the discounters.

Rents are still sluggish. Rental growth remains negative, with only retail warehouses showing weakly positive growth. This isn’t especially surprising given the persistently low footfall numbers (half-term aside) and the strain on household finances. Retail rents were falling pre-covid and whilst they have almost achieved level footing once more (rental growth last 12 months: -0.9% for shopping centres, -3.8% for high street and +1.2% retail warehouse) rental growth could easily slope back into negative territory.

Other uses look attractive. Such is the position of all but the best quality retail that owners are faced with finding alternative uses. An example is Princes Mead in Farnborough, which was sold to Sovereign Housing Association after planners agreed in principle to a residential-led development. Ultimately alternative uses for retail together with a much-reduced development completions pipeline will help to shore up occupier demand for the remaining smaller pool of assets.

Online retailers fare better. Despite overall sales volume declines, online retailers fared better with volumes still 18% above pre-pandemic levels, despite a fallback of online’s share of the retail slice.

That all said, no surprise that yields under pressure. The retail sector didn’t benefit as strongly from the post covid bounce back in either occupier or investment activity as evident in other sectors (industrial performing most favourably). Now given the retail outlook, yields continue to hover well above the other sectors reflecting their lack of rental growth potential.

Yields are likely to soften further in reaction to the increased borrowing costs – even a modest re-pricing would take yields potentially to their highest level since the Global Financial Crisis. Within the retail sector, it is retail warehouses and supermarkets which continue to hold the most interest for investors, the former often as a way to exploit alternative uses (critically logistics). Supermarket Income REIT has been a particularly active investor. Outside the large institutional-sized investment, the auction market for High Street investments is still performing relatively well given the smaller lot sizes and lower debt requirements.

Retail: key investment transactions