The Retail Property Outlook for 2019 - National & Central London Occupier Markets
An outlook for 2019's Retail landscape in the UK.
6 minutes to read
Overview
The ‘annus horribilis’ of 2018 has proved an overdue wake up call for the UK retail market. 2019 needs to go beyond basic soul-searching and the whole industry needs to proactively address the structural shortcomings that threaten to undermine it.
• Further retailer CVAs and administrations cannot be ruled out, but the tide is slowly turning against a system that needs to be more equitable and transparent. Retail occupier markets will remain in a state of flux as CVA contagion and uncertainty prevail. There is next-to-no stimulus for rental growth in any retail sub-sector.
• The fate of Debenhams in 2019 will be a watershed moment for UK retail. As the largest occupier of non-food floorspace in the country, the outcome of its negotiations with landlords and the prospect of “up to” 50 stores closing will set the tone generally – particularly as to whether the necessary compromises are to be made to future-proof the whole sector.
• Retail property investment markets will remain subdued against this backcloth of occupier uncertainty and negative sentiment generally. Investment markets remain hamstrung between the gulf in historic valuations and buyers’ expectations.
• The investment case for the right retail stock (strong fundamentals, relevance to its catchment, a good trading story, realistically priced) remains a compelling one. But retail needs to be experiential and / or convenient, rather than merely perfunctory.
• Longer term, the outlook for UK retail is brighter than most over-sensationalistic media reports would have us believe. The high street has proved time and time again that it is more resilient than it is given credit for. But proactive intervention is still desperately needed to right the structural wrongs of the past.
National Occupier Markets
Flexibility remains a key aspiration, with break clauses or multiple break clauses a prerequisite for many retail occupiers and a key component of future adaptability against changing business and economic influences. This is now a structural reality and is unlikely to change.
• The occupier outlook for 2019 is very cautious, with the general perception that the market will continue to become more challenging and may worsen, hurdle rates being adjusted accordingly and often assume year-on-year percentage declines in physical store sales. Despite ongoing movement to online, most agree that physical and online sales platforms can be used to help drive each other.
• Total occupancy (rent, rates and service charge) cost parameters are being reviewed. In particular, there is huge pressure on service charge levels, caps are becoming more commonplace and marketing / other non-core service charge items are heavily scrutinised. Any rates savings or reductions that can be obtained are mutually beneficial to both tenants and landlords.
• Turnover rents are becoming more commonplace, including inclusive turnover rents at higher percentage levels, typically 10 – 15%, to include rates and service charge. This structure is the only basis that would be considered by retailers, particularly fashion operators, to take space in perceived high risk or lower category markets. It “de risks” trading position by effectively capping total cost base in line with a general 10 – 15% cost/turnover ratio.
• Retailers will continue to undertake strategic reviews of their entire portfolio and this will be used to drive acquisition and disposal strategy. Increasingly, in town / shopping centre and out-of-town / retail parks will become an “either / or” option (as opposed to dual representation), as many retailers look to reduce the number of stores in their portfolios as part of wider cost-cutting programmes.
• Re-gear and lease restructuring deals will account for a significant percentage of transactional activity in the retail sector, rather than new lettings. Rightsizing (be that upsizing or downsizing) will still be the key transactional driver.
• Larger city centres, key regional shopping centres and “coffee circuit / affluent market / commuter towns” generate higher levels of demand than secondary locations and towns with multiple shopping centres, which are generally over-shopped. There are clear affordability issues in some of these locations, particularly when it comes to seven figure rents and in very select locations where “tone” surpasses £400 - £450 ZA.
• Occupier demand is very selective and requirements very specific, with retailers unwilling to compromise on space, location or cost parameters. The current marketplace is offering opportunities for more dynamic retailers to reshape and adapt their stores, lowering costs and building in future flexibility across the portfolio.
• In terms of individual sub-sectors, Fashion, Sports / Leisure and Beauty / Cosmetics are all showing signs of positivity, but a number of value / discount retailers are also still active.Department Stores far less so – we expect more break up and redevelopment of department stores aligned to specific retail demand by location and size, with upper floors opening up to leisure, hotel and even residential / office use possibilities.
• More CVAs are expected in 2019, which is clearly not a good outcome for the sector as a whole. More than anything, it is creating a dual market with those that might benefit form discounted rents under CVA, compared to those retailers that run their business successfully and engineer portfolio restructuring and cost saving through negotiated means.
• 2019 will see a great deal of transactional activity on the part of retailers, but reflective of individual parameters and business aims. As in 2018, flexibility and cost will be the key drivers.
Central London Occupier Markets
• A burgeoning tourist market and the prospect of vastly improved transport infrastructure on the back of Crossrail continues to partially incubate operators in the capital against more general pressures facing retail markets.
• Paradoxically, continued macro-economic and political uncertainty continues to provide a boost to the Central London retail market in the shape of higher numbers of in-bound international visitors. Ongoing weakness of Sterling will ensure a continuing influx of tourists.
• Travel retail will continue to be a bright light, particularly on the back of the long-awaited opening of Crossrail. All the Crossrail station hubs have benefited from heavy investment and some have given rise to wider infrastructure improvement projects. The Paddington Square project (on which Knight Frank is instructed) will be delivered in late 2021, while Westminster Council has also launched their new plan for Oxford Street and the West End, which will be a key aspect of improving accessibility and the retail environment over the next few years.
• London will retain its status among the world’s leading luxury brands as a global market with unprecedented appeal. “Experiential” will remain an industry buzzword, with brands seeking to sell experiences, not just products, at their stores and developing ever more engaging store environments for consumers, as well as launching new concepts.
• Rents in certain locations (particularly the main thoroughfares) have been kept in check by increases in business rates. However, propositions that are priced correctly will continue to appeal to retailers. Alternative / leisure uses will continue to pick up larger space that becomes available.
• A string of F&B CVAs in 2018 has taken some of the froth out of the casual dining sector generally and the A3 market will continue to consolidate. Again, the notion of “place-making” becomes all-important and landlords are increasingly taking a more pragmatic view to secure the correct brand and concept, rather than necessarily chasing income.
• Key buzzwords for 2019 – “accessibility”, “consumer engagement”, “health & wellness” and “experiential”.
To discuss any of the points raised in this article please contact Knight Frank's Retail Team.