2018 is on course to be the most catastrophic year for store closures since 2008, with more than 10,000 shops expected to cease trading overall – on top of the near 61,000 that closed between 2012 and 2017.
This ‘High Street bloodbath’, and the job losses that come with it, has been well-documented; traditional retailers are urgently slimming down their store estates in order to survive the rise of online shopping and manage rising costs.
But this doesn’t just leave people out of work, and gaps in UK’s High Streets, shopping centres and retail parks. The dwindling demand for shops is taking its toll on retail property values too.
There is clear evidence of retailers struggling, sales and profit margins are declining, as this chart from Green Street Advisors shows
As retailers negotiate lower rents or better terms to help make ends meet, retail property owners will be hard pressed to find either rental growth or capital value growth for a long time to come, says Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs.
Indeed, compared with other parts of the commercial property market – urban residential, offices or logistics – the retail sector is expected to under-perform with some assets seeing significant valuation falls.
Just last month Credit Suisse cut the share price target for two real estate investment trusts that have nailed their colours to retail.
The investment bank downgraded shopping centre landlords Hammerson and British Land to ‘underperform’, amid weaker occupier and investment demand in the sector.
British Land has since said that the combined impact of administrations and store closures since April 2017 has knocked 1.6 per cent off its rent bill.
So, when it comes to investing in real estate, the obvious thing may be to steer clear of retail property altogether.
But, some property firms and funds believe there’s an opportunity to be found in the High Street squeeze, and claim you could do worse than to invest in the future of shops.
According to the Centre for Retail Research, as many as 10,000 shops may close this year
Some even argue that now is a good time to get a slice of the pie – as a ‘herd mentality’ in capital markets misprices good quality retail space and presents ‘excellent investment opportunities’.
The key, as always, is being one step ahead of retail’s rapid evolution, and having a grasp of the sort of stores in the sort of locations that are likely to have a long-term future.
Location, location, location
‘The pendulum of pessimism in investment markets often swings too far,’ says Hugo Machin, co-head of global real estate securities at Schroders, who – despite the challenges – firmly sees a healthy future for physical stores… as long as they are in ‘excellent locations’.
‘The advantage lies with landlords who have scale in the strongest global cities,’ he says, as this is where there is still high demand for retail space and where landlords are able to carefully curate the tenant mix to suit.
These firms have the benefit of being in locations with broad cultural appeal, boasting not just shops, but restaurants, theatres and museums too, and with mass transit systems designed to bring people directly to them.
But, while those with scale and location advantages can do well, the same can not be said of owners with property in regional and local high streets, which he says are ‘at the mercy of a dwindling pool of retailers’.
‘If a visit to the shops in a regional town is no longer a necessity, as those goods are available online, then the future could be bleak,’ Machin warns.
Local High Streets will be worst impacted, while investors still have high hopes for global cities
The right type of stores
For Richard Peacock, manager of the £687m Kames Capital Property Income fund, which has 29.2 per cent exposure to retail, the type of shopping destination and retail offer is paramount.
His fund mostly hedges its bets on retail stores that include ‘a complete leisure experience’ with food, drink, entertainment and interaction, as these are less vulnerable to the threat of cut-price online rivals.
Kames also focuses on sites that offer ‘hyper convenience’ in densely populated catchment areas, such as local supermarkets, coffee shops and banks, where shoppers can get instant gratification.
Richard Peacock, manager of the Kames Capital property income fund, predicts large supermarkets will eventually be downsized
The flip-side is that the fund steers clear of shopping centres, department store tenants, or large format supermarkets.
Some investors have successfully repositioned what were bulky good parks selling everything from TV’s to tumble dryers, into fashion parks, which perform well
‘Larger format superstores will need to be downsized as part of a shift towards convenience,’ Peacock argues.
According to De Mello, the retail warehouse sector is a small but potentially lucrative ray of sunshine for property investors too.
‘Some investors have successfully repositioned what were bulky good parks selling everything from TV’s to tumble dryers, into fashion parks, which perform well for mass market retailers like M&S, Next, Mothercare and others as they offer ample parking, a well configured store, and comparably much lower rent than high street units.
‘Those with a heavy weighting towards such parks could be seen to be relatively more investible, therefore, than investors with a strong high street presence,’ he says.
But what does that mean for the High Street?
Schroders says High Street locations can still work, if the landlord owns enough of the area to effect change.
Machin points to Shaftesbury, listed in the UK, which has transformed its West End ‘villages’: Carnaby Street, Chinatown and Seven Dials in Covent Garden, and the reinvention of Marylebone High Street by the Howard De Walden estate.
These firms have been through lengthy negotiations with retail lease holders to change up the tenant mix, as well as working directly with the local council and sacrificing rental income in the short-term.
Shaftesbury has reinvented several pockets of London, including Carnaby Street (above)
‘If done in a considered way, high streets with independent retailers don’t compete with Amazon,’ Machin says.
Of course, there are fewer examples of such transformation opportunities outside of London, where supply now outweighs demand.
But today’s store closures could still open new doors for some landlords.
Calum Bruce, director of investment at Ediston Real Estate, says: ‘Earlier this year a Company Voluntary Arrangement (CVA) at our Kingston retail park in Hull, caused by Toys R Us going into administration, actually saw B&M more than double the size of the space they rented from us, showing how store closures can yield positive results.’
So it’s not all doom and gloom in retail, nor in retail property.
Funds encumbered with legacy portfolios featuring large, obsolete retail assets are of course going to suffer as the sector and shopping habits evolve.
But, property owners and investors that are one step ahead will brave out this storm and profit from a future for shops.