Real Estate Research

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.


Patrick Bone

Patrick Bone

Property Analyst


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

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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Out-of-town but not out of fashion 8 pages | 335 kb