November 2022
Investment agents Mrs Positive and Mr Negative summarise the retail investment market in 3 minutes:
Mrs Positive: So now we have some political stability and direction following Jeremy Hunt's credibility restoring budget, can we expect the market and transaction volumes to rebound to H1 levels?
Mr Negative: I can’t see that, headwinds are coming from every direction impacting all aspects of the economy and more importantly the consumer. We are in middle of peak fear, with inflation now over 11% and expected to stay high for longer than previously predicted, the worst is yet to come. It’s been a mild autumn so far and the reality of the cost of living crisis is expected to peak in Q2 next year.
Mrs P: Everyone is going to have less spending power but the question is how do they spend it. Retail sales grew by 4% in Q3 and are likely to remain strong with the World Cup looming. Historically spend has been resilient during times of high inflation, as people cut back on big expenditure items like holidays and cars.
Mr N: Past performance and all that, but we are in a different world to the early 1990’s, car ownership has moved towards leasing models and personal debt is at a record high. A dangerous combination with rates rocketing.
Mrs P: But the occupier market remains strong with a depth of occupiers who have finely tuned their offer post Covid. The increase in utility and staff costs should be mostly offset by business rates savings. The online vs physical debate has concluded. The smart phone might be the wheel of the 21st century but without a complimentary multi channel offer online-only operators and their low margins are unlikely to withstand the headwinds. We expect them to experience the deepest occupier distress.
Mr N: So why is there such a substantial disconnect between the occupational and investment market? Investment usually follows the occupational market fundamentals. Yields have moved out considerably since June, especially at the tighter end of the market. Albeit most town centre retail assets had already re-based and have been less exposed than other property sectors.
Mrs P: Dare I say it but has retail finally bottomed out…Ive been fed up with hearing ‘not wanting to catch a falling knife’ in this sector. The sector already had a challenging/impossible availability of debt and therefore there will be limited distress this time round. That tree has been rattled many times before.
Mr N: Agreed but there is still significant misalignment in pricing, pretty much all ‘big ticket’ retail sales have been put on hold, which doesn’t sound like the strongest negotiating position for the vendor.
Mrs P: The property market filters back from Gilts and they have stabilised/improved since Rishi took over. Counter cyclical investors have been circling the retail market and the sub £25m market is still liquid. Given most retail assets are sub £25m now and the occupational market is still buoyant; is there an argument to say now is the time to buy supported by occupier fundamentals?
Mr N: But aren’t some of those counter cyclical buyers going to turn their attention back to other more distressed sectors after pricing has moved out? The funds are not going to hold or buy retail assets outside of the top 25 Cities/schemes. With building cost inflation putting pressure n viability of retail repurposing, we are likely to see the right sizing of centres outside of the south east slow. Combined with increasingly stringent ESG criteria ruling out a lot of existing property. In all I think the next 12 months will be slow with limited retail transactions over £25m, consumer spend to weaken next year and therefore the occupational market will dampen investor sentiment further. I’m just pleased I’m not a valuer.
Mrs P: Whilst I’m not being complacent about the future challenges, this is one of a thousand cuts in the retail sector, rental and capital values psf are rebased to attractive levels. Occupiers are going into this downturn with their eyes open. Outside of the squeezed middle centres, retail property provides a rebased sustainable income stream. Markets always over react, I think we will see increased activity from Q1 as investors adapt to new consumer spending habits and seek attractive opportunities against other asset sectors/classes.
GCW: Our opinion is that the retail market is well prepared for this downturn and will be more resilient than people think. The investment market will pick up in the new year and will present buying opportunities in the right pitches/locations.