UK retail investment review Q2 2020

Retail investment market shuts down during the COVID-19 lockdown.

A halt in all but the most essential activity put a strain on cash flows for retail occupiers and investors in Q2. Impacts on physical retailing are likely to have played a big part in the decision by Orion Real Estate Fund in May to walk away from its purchase of seven retail park assets from Hammerson (forfeiting its deposit of £21m). Just £630m was invested into retail real estate in Q2 2020, 71% lower than the same period last year.

The impact of COVID-19 on retail real estate has varied by segment

The supermarket segment, benefitting mostly from non-discretionary retail-spend, fares better in economic downturns than those that depend on discretionary spending. Relatively positive sentiment meant that the prime equivalent yield estimates for supermarkets for Q2 2020 remained stable at 4.75-5.0%. Another sector where yields have remained stable, for very different reasons, is the prime bulky goods retail warehouse sector. This segment has had a rebasing of rents to a low, affordable level. In contrast, prime fashion open-A1 retail warehouses tend to have much higher rental levels and falls are likely to be substantial going forward.

Forecasts tend to be worse than initially expected in a downturn, looking at relatively negative scenarios as a point of reference appears sensible

Forecasts tend to be worse than initially expected in a downturn, so looking at relatively negative scenarios as a point of reference appears sensible. Weak secondary shopping centres have the worst predictions, and expensive retail units in the West End are also a prime candidate for a price correction. Supermarkets, which could see positive total returns of c.2.5% in 2020, are the exception. Total returns might return to positive territory towards the end of 2022 for some retail sectors, but we expect investors to start buying select opportunities at attractive ricing from 2021 onwards.