Despite a “flight to quality” in the retail property market over the last few years, even prime shopping locations could feel the pinch from falling consumer spending, a leading economist has claimed today.
Recent data from industry analysts Investment Property Databank (IPD) supports other evidence which has shown that whilst demand for secondary and tertiary retail space has fallen, traders have been moving more of their stores into prime locations.
According to the IPD latest quarterly report, prime standard shop rental values have risen by more than four per cent over the past year, albeit driven almost exclusively by demand in central London, while prime retail warehouse rents have slightly increased and shopping centre rents stayed stagnant.
Economist group Capital Economics (CE) argues that consumer spending is set to take a further plunge in the next year and that even prime locations will not be immune to the effects to the market.
Kelvin Davidson, Property Economist for CE, said: “Arguments that further “flight to quality” will insulate the landlords of prime retail property from the effects of a renewed drop in consumer spending have a strong intuitive appeal.
“But there must be a risk that if, as we expect, consumer drops below the levels seen at the depths of the 2008/09 recession, occupiers put all strategic decisions on hold.
“It is surely possible, therefore, that the recent migration towards prime space is rapidly replaced by a period of paralysis, during which most retailers simply postpone all relocation and/or expansion decisions.”
Whilst general retail sales levels across the UK have struggled throughout the year, major shopping centres and major tourist locations such as London’s West End have defied the gloom with strong trading.
Davidson warns however that the recent high profile administrations of Habitat and Jane Norman are not likely to be the last, and points towards figures from professional services firm Ernst & Young which show that profit warnings from listed retailers surged up to 2008 levels in the first half of the year.
CE predicts that consumer spending will drop by 1.5 per cent in total in 2011 and by a further one per cent in 2012, with levels returning to those last seen in mid-2005 and the two-year decline being similar to the 3.3 per cent crash seen in the recession of the early 1990s.
“Average prime retail rental values did not escape the previous recession unscathed and we struggle to see how they will be completely immune to this episode of falling consumer spending,” Davidson added.
“Admittedly, thanks not least to the protection of existing leases, landlords’ income streams from prime retail property did not decline in 2008/09 and may hold up again over the next 12 to 18 months.
“But flat income, rather than continued growth, is probably about the best that can be hoped for.”