Opinion: Oli Horton

Investment agents Mrs Positive and Mr Negative summarise the retail investment market in 3 minutes.

Mrs P: Inflation has peaked, base rates are close to pivoting and retail sales continue to outperform forecasts. Can we expect confidence to return in the investment markets and transaction volumes to rebound later this year?

Mr N: I can’t see that. Headwinds are continuing to disrupt the economy and consumers from all directions. The recent banking crisis has added to fears that credit will become less available and with inflation still above 10%, we are unlikely to see a quick reverse in base rates. Is the worst yet to come?

Mrs P: Everyone is going to have less spending power, but the question is how do they spend it? So far, the UK has found its shopping habit hard to kick, retail sales remain remarkably resilient. People are cutting back on big expenditure items like holidays and cars.

Mr N: The last time inflation was this high was in the early 1990s and we were in a different world then. Car ownership has moved towards leasing models and personal debt is at a record high. That’s a dangerous combination with rates still rising.

Mrs P: But there is a depth of occupiers who have finely tuned their offer post-Covid. Rising utility and staff costs should be mostly offset by business rates savings. Without a complementary multi-channel offer, online-only operators with their low margins are likely to experience the deepest occupier distress.

Mr N: So why is there such a disconnect between the occupational and investment market? Yields have continued to soften, 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? The sector already had a challenging availability of debt and therefore there will be limited distress this time round.

Mr N: Agreed, but there is still significant misalignment in pricing and almost all ‘big ticket’ retail sales have been put on hold. That doesn’t sound like the strongest negotiating position for vendors.

Mrs P: Counter cyclical investors have been circling 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 be made that now is the time to buy?

Mr N: But won’t some of those counter cyclical buyers focus on other more distressed sectors after pricing has moved out? The funds won’t hold or buy retail assets outside of the top 25 cities and schemes. Building cost inflation and stringent ESG criteria means there will be less right-sizing of assets outside the South East. I think the next 12 months will be slow with limited retail transactions over £25m. Consumer spend will weaken and the occupational market will further dampen investor sentiment.

Mrs P: I’m not being complacent about these challenges, but outside of the squeezed middle centres retail property provides a rebased sustainable income stream. I think we will see increased activity after the summer as investors adapt to new consumer spending habits and seek attractive opportunities against other asset 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 September and present buying opportunities in the right pitches and locations.