Retail property faces tough year ahead
By Jon Whiteaker - 05:35PM - Fri 12th November 2010
On Thursday Land Securities became the second UK property firm in a week to announce positive sounding first-half results but despite these companies’ optimism, next year will pose serious challenges for commercial property.
Earlier in the week Hammerson revealed that retail occupancy levels rose marginally to 96 per cent over the last six months, while Land Securities reported a 1.1 per cent rise in rental values in its report.
Falling consumer confidence and the continuing decline of the high street and secondary shopping centres could cause growth in the sector to slow and rental values to drop.
Kelvin Davidson, Property Economist at Capital Economics, said: “We are not optimistic about the next year for retail property, the overall spending picture is weak. Vacancies are already high outside of London and that will just get worse.”
An increasing regionalisation of retail performance is skewing the indicators of the industry’s health, with London being the home of most of the property investment and consumer spending.
“Retail vacancy in central London is down but in the rest of the country its up, London is almost like a different country in that respect,” Davidson added.
According to statistics produced by property company CB Richard Ellis (CBRE), retail rental growth is set to grow by just 1.4 per cent between 2010 and 2015.
The regional differences are marked however; during that time period London will experience 3.6 per cent growth, whereas Scotland will see a decline of 0.5 per cent.
This growth comes from a smaller base than office rentals, which were harder hit during the recession and will grow 5.6 per cent in the next five years, and CBRE argues that when this is taken into account retail performance is set to be broadly similar to the other sector.
Davidson is more pessimistic and predicts: “Retail will underperform other markets with values dropping one or two per cent, whilst yields will remain flat.”
With around 35 per cent of current retail construction taking place at just one site, Westfield Statford, most of the country is clearly not attracting a great deal of investment for future projects.
Exceptions include Land Securities’ new Trinity Leeds centre and proposed redevelopments by Hammerson of its Silverburn centre in Glasgow and Bullring building in Birmingham.
All of these are major shopping centres, or primary centres, which are performing well at present whereas smaller secondary centres in regional towns and cities are struggling to attract retailers.
Jon De Mello, Head of Retail Consultancy at CBRE, commented: “In terms of a double-dip recession, we do not anticipate a return to decline across the economy but there potentially could be a double-dip in certain areas of the country.
“Retailers will be looking to optimise and rationalise because costs are going to increase. They need to find money from somewhere and closing less-profitable stores will be an attractive option.”
Arcadia announced that it is planning to close as many as 200 stores across the country to streamline its presence and if it goes ahead most of these closures will be happening in small towns where empty properties are a growing trend.
A report by the Local Data Company in September revealed that some towns have vacancy rate of as much as 30 per cent, and the British Property Federation recently called for tax breaks to be reinstated for empty shops.
Growth in online trade, better commuter links and the rise of supersized shopping centres have all limited retail expansion to every corner of the UK.
The National Survey of Shopping Patterns published by CBRE this year found that retailers used to require stores in 200 locations across the UK to be accessible to 50 per cent of the population, now that figure has dropped to 90 locations.
As a consequence retail investment is being concentrated in a few primary centres, and with major retailers looking to increase floor space as sales decline rental rates in these areas are much higher than the industry standard.
De Mello explained: “New successful retailers such as Superdry are looking to expand their presence in the best locations and this is helping to push rental rates up in primary centres.
“Additionally, up and coming international brands like Forever 21 and Best Buy want to be in the same locations and have been gazumping domestic retailers by accepting higher rates on properties.”
Retail parks offer a more positive spin on 2011, resurging following investment by supermarkets which have discovered their usefulness for click and collect services.
Leases have been decreasing in length for some time and more retailers are likely to be taking advantage of short-term contracts over the coming years.
Davidson said: “I think you will see more pop-up type shops over the next year, and Morrisons may trial its convenience store format using short-lease contracts.”
In the popular consumer areas demand for retail space will remain high but next year may be the last expansion push before industry slowdown.
As local government investment retreats from small towns, the affects caused by the continuing decline of the British high street remains to be seen.
De Mello concluded: “The window is closing for retailers to aggressively expand, it is still a retailer’s market but it will become more of a landlord’s market in the next few years.
“But there is always a level of churn within retail property and even the successful primary centres will continue to have at least a couple of per cent vacancy at anyone time.”
By Jon Whiteaker