UK retail 2023 – what we’d like to see vs what we’re likely to see
This week’s Retail Note revisits Knight Frank’s Retail Property Outlook report (‘Riders on the Storm’) and focusses on four key issues: how the recession will play out, CVAs / occupier fall-out, business rates and ESG.
5 minutes to read
Key Messages
- Shallow, but protracted recession, with tighter fiscal policy backloaded
- Bank rate to peak at 4% in early 2023
- Inflation already peaked in Q4 2022…
- …but on a very slow descent (CPI not <2% til 2024)
- Retail sales values to remain in positive territory (>3%)
- Retail sales volumes unlikely to recover until Q4 2023
- Less occupier distress / fall-out than previous recessions
- A growing number of online pure-player casualties
- Consolidation as store-based / multi-channel operators acquire online pure-plays
- A “pause for breath” on business rates as new measures are implemented
- Freeze in the business rates multiplier unlikely to be extended beyond a year
- The possibility of an online sales tax parked for now
- Increasing clarity in ESG as to what constitutes a ‘green’ investment
- Some operators renege on ESG promises due to cost pressures
- Increased action on the ‘E’, a by-product of spiraling energy costs
- Renewed attempts to quantify/leverage the ‘S’
- More “greenwashing”, ESG continuing to be used as a marketing tool.
With the Christmas reporting season coming to a close, a good time to return to Knight Frank’s wider predictions for the retail market in 2023, penned by myself and my colleague Emma Barnstable.
No self-fulfilling prophesies here – we distinguish between what we’d like to see and what is actually more likely to play out. A degree of commonality on some aspects, but plenty of divergence too.
On how the recession will play out
What we’d Like to See
Recession proves much shorter and shallower than anticipated. High inflation to recede swiftly from Q1 2023. Consumer demand continuing to hold up. Retail sales values remain comfortably in positive territory (>3%) and the current decline in retail sales volumes reverses from Q2 2023. Retail property investment markets stabilise after quick, decisive correction and volumes return. Perspective rather than hysterical over-reaction.
What we’re Likely to See
A more protracted period of recession, given that tighter fiscal policy is backloaded. Bank Rate to peak at around 4% in early 2023. Inflation to peak in Q1 2023 (possibly even by Q4 2022), but the descent will be slow (CPI not hitting <2% until 2024). Retail sales values stay in positive territory, but volumes do not recover until Q4 2023. Hysterical over-reaction rather than perspective.
ON CVAs / FALL-OUT:
What we’d Like to See
No occupier distress whatsoever. Retailers so streamlined and battle-hardened post-COVID that they are able to ride out the storms that will inevitably brew in 2023 virtually unscathed. Those that do experience distress seek alternative re-financing means rather than launch a CVA and proactively engage with landlords as part of any restructuring process. Occupier consolidation / M&A rather than outright fall-out.
What we’re Likely to See
Less occupier distress and fall-out than many are anticipating – certainly less than in previous recessions, when the retail market was in a far more bloated, ill-prepared state. A growing number of online pure-player casualties as tightening debt and finance markets raise question marks over the viability of perennially loss-making businesses. A number of online pure-players being acquired by multi-channel operators.
On business rates
What we’d Like to See
The Chancellor’s surprise package from the Autumn Budget proving a launchpad to a full review of the Business Rate system, rather than a temporary, short-term fix. Following through on the pledge to abolish downwards transitional relief caps and potentially reducing (rather than just freezing) the multiplier over the longer term, with a view to levelling the playing field and neutralising the burden on store-based operators.
What we’re Likely to See
Something of ‘pause for breath’ as the new measures are implemented and the effects wash through. Inevitable protestations and lobbying from the industrial sector as the full effects of rental growth percolate through to taxation. The freeze on the multiplier unlikely to be extended beyond a year and then likely to increase rather than reduce. The possibility of an online sales tax explored – but parked for now.
On ESG
What we’d Like to See
- Accelerated action on at-risk assets: with just seven years left to 2030 (when a minimum EPC Grade B is required) time is running out for those most at risk of being stranded. Assuming a 5-year average lease, assets most at risk are just over one letting cycle away from being stranded. As much as 90% of retail property will need to be improved by 2030.
- Meaningful and measurable strategies: realistic roadmaps that address the impact of business models, with due attention given to all three facets (E, S, & G). A concerted move beyond corporate jargon and ESG clichés regurgitated in most CSR / ESG annual reports. More innovative responses to the challenges.
- Retailers’ claims challenged and substantiated: universal clampdown on deceptive “green-washing” tactics which mislead consumers (to a degree, this is already underway, with the CMA investigating the likes of ASOS, Boohoo and George).
What we’re Likely to See
- Some clarity over what constitutes a ‘green’ investment: transparency over sustainable investment fund criteria with the conclusion of the FCA’s consultation on Sustainable Disclosure Requirements & investment labels due in June 2023 (but note, only with a focus on specific green investment products, rather than relative ‘greenness’ of more general investment).
- Test of priorities: some operators temporarily renege on ESG promises due to cost / supply chain pressures (e.g. Iceland using palm-oil products following a reduction in sunflower oil supply).
- More head-scratching / exploration: understanding what ESG really means for each stakeholder in the sector. Understanding and owning what they are responsible for (e.g. Scope 1, 2 and 3 emissions) and formulating a response. Increased investment / recruitment of ESG-specialists / consultants to formulate supposedly slick (in reality, corporate cookie cutter) strategies.
- Increased action on the ‘E’: likely to be promoted as an ESG-led initiative, but realistically sparked by spiralling energy costs.
- Attempts to quantify / leverage the ‘S’: highlighting social benefits of their assets to local communities during recessionary periods.
- More “green-washing” / ESG employed as a marketing tool: more promotion of net zero / science-based targets. More reporting to the TCFD. Increased uptake of green certifications by retailers (e.g. B Corp status).
Click here (or on the thumbnail below) to access the full report.