Research (Professional Only)

Out-of-town but not out of fashion

The UK retail sector is going through a period of unprecedented change. Consumers are struggling  in the aftermath of the deepest and most prolonged recession in recent history.

24 September 2013

Patrick Bone

Patrick Bone

Property Analyst

Background

The UK retail sector is going through a period of unprecedented change. Consumers are struggling in the aftermath of the deepest and most prolonged recession in recent history. Excessive levels of household debt, tighter lending conditions and macro economic uncertainty have all contributed to the weakest consumer recovery on record (see chart 1).

A weak consumer environment has been compounded by well documented structural changes, creating the backdrop for what some commentators have described as ‘the perfect storm’. Growth in online shopping and increased competition from supermarkets has taken market share away from traditional in-store channels. With 50% of high street and shopping centre leases due to expire by 2015 this represents an opportune moment for retailers to rationalise their portfolios (the comparable figure for retail warehouses is just 15%)1. The net result being a glut of boarded-up shops and premature talk about the ‘death of the high street.’

In light of these developments it is unsurprising that the investment performance of the UK retail sector has suffered. In 2009, retail rents fell by 5.6%, the largest calendar year decline in the history of the IPD Index. Even out-of-town retail, which had enjoyed consistent rental growth from 1983, saw rents fall.

Indeed whilst in previous recessions the retail sector has proven to be relatively defensive, during the financial crisis retail rents fell in line with the wider market (see chart 2).

Growing divergence in performance by retail formats

Although retail performance has deteriorated, the impact has not been felt evenly across all formats. What we have seen is an increase in the polarisation between retail locations that dominate their catchment and weaker, more secondary locations.

Vacancy rates offer some insight into the success of different retail locations. Most formats have seen the number of empty units rise; however, vacancy rates have remained lowest in fashion parks, regional shopping centres and shops in prime towns (see chart 3). This trend is also replicated in rental performance. The only area to record rental growth over the period end 2008 to end 2012 has been central London. Fashion parks and regional shopping centres have seen a moderate fall in rents and have fared considerably better than the high street and in-town shopping
centres.

Is the UK consumer past the worst?

We are not expecting a particularly strong recovery in retail sales, but we believe we are now past the worst. Consumers have taken advantage of lower mortgage costs over the past five years to pay down debt and increase their savings. Indeed the debt to deposit ratio has fallen back to 2002 levels, meaning the consumer balance sheet is now in a far healthier position than it was at the start of the recession.

Schroders expects consumer spending to gradually improve in the second half of 2013, with growth of 1.5-2% p.a. in real terms over the next five years. This is some way below the 3-4% p.a. growth we saw in the decade leading up to the financial crisis, reflecting our view that we are unlikely to return to the debt fuelled spending we saw pre 2007.

Although consumer spending is expected to improve, clearly there are a number of major structural shifts underway which are fundamentally changing the way in which we shop. Understanding these changes is increasingly critical for investors if they are going to position assets towards those formats and locations that are set to benefit, or at least be defensive to these changes.

 

1 Jones Lang LaSalle, May 2012

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mentLimited and may not necessarily represent views expressed or reflected in other Schroders 

communications, strategies or funds.
For professional investors and advisors only. This document is not suitable for retail clients.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Property Investment Management Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to
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Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.