Central London Retail: still lagging
COVID-19 Market Update – 13/08/2021
11 minutes to read
Introduction
This is the 49th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note focusses on two key issues:
- Central London Retail: what recovery?
- What we learned from the BRC retail sales figures for July
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• Retail sales +6.4% y-o-y in July (+4.7% like-for-like)
• Some inevitable deceleration in growth
• Sales +9.1% on corresponding month in 2019
• Food sales +2.9% (+0.8% like-for-like)
• Clothing, footwear, jewellery fastest growing categories
• Online sales decline -0.4% y-o-y
• Central London seeing a slower rate of recovery than elsewhere
• West End mobility -55 below baseline in June
• Footfall only ca. 45% of normal levels
• Oxford St prime zone A rents at 2010 levels (£675/sq ft)
• Oxford St vacancy rates 13.5% vs long-term average of 2.6%
• Central London rents -1.7% in Q2, capital values -1.5%
• Evidence that these declines are bottoming out
• Investment yields have remained fairly stable
• Bond St 2.75% (+25bps since March 2020), Oxford St 3.50% (+50bps)
• London Retail wedded to fortunes and profile of London as a city generally.
1. Central London Retail: what recovery?
Central London: still the laggard in the UK retail market. “Unprecedented” vies only with “uncertainty” as the most over-used COVID-related term. But in the case of understanding the level of impact the pandemic has had on retail markets, the capital definitely finds itself in uncharted territory. Our Q2 Central London Dashboard puts this firmly into perspective.
In simple terms: in times of past crises and recessions, Central London has proved more than resilient, often to the point of completely defying gravity. The surge in West End retail rents despite the Global Financial Crisis being a classic case in point. But with COVID-19, Central London has not been incubated in the slightest and if anything, has been more cruelly exposed to the effects of the pandemic than anywhere else.
It doesn’t take a genius to ascertain why: any retail market is dependent on people and those people simply haven’t been there. More than any other location, the capital is far more dependent on tourist and worker traffic. CACI data show that ordinarily, tourists make up ca. 46% of retail spend in the West End, with workers contributing a further 9%. Compare this figures with much lower national averages (tourists 11%, workers 6%). We don’t have the numbers, but workers are also responsible for a very significant proportion of London’s hospitality spend.
With lockdown lifted, workers are returning to the capital – slowly. Mobility data from Google shows that ‘Retail and Recreation’ footfall in the West End was -55 below baseline in June. Expressed another way, West End footfall is still only around 45% the level it should be. June marked something of surprising backwards step on May (-48 / ‘52% vs normal’), but July has since seen a return to a more positive trend (-46 / ‘54% vs normal’).
A city effectively operating at just over half its capacity may not seem desperately positive, but consider where we were. At the nadir of the pandemic (April 2020), Mobility was -95 below baseline, so footfall was just 5% the level it normally would be. Even as recently as March this year, Mobility was still as low as -85 below baseline. The trend is improving, but there is still a long way to go.
With zero trade in many cases, the pandemic has been desperately tough on retail occupiers. Even in periods between lockdowns, it has not always been financially viable for many retailers and hospitality operators to re-open. Against this backdrop, occupier activity unsurprisingly remains severely constrained. EGi lists just two Central London retail lettings in Q2 and although this may not capture each and every actual deal made in recent months, it is nevertheless a sobering reflection of the current level of (in)activity.
But ironically, now could actually be the best time to acquire space in the West End. Rents are more affordable than they have been for many a year and landlords more compliant (desperate?) than may otherwise be the case. On the surface, it may take a brave operator to sign deals based on current footfall trends, but for those taking a long-term view and with the available finances, now could be the time to make hay.
The lack of deals makes it difficult to derive an accurate handle on rents. Prime zone A rental tones on Oxford Street are thought to be around £675/sq ft, when in 2018, they were nudging £1,000/sq ft. The last time Oxford Street rents were this low was 2010.
Rent rebasing has been slightly less severe in other Central London locations. Prime zone A rental tones on Bond Street are around £2,050/sq ft, about the level they were at in 2016. From a high of £800/sq ft a couple of years ago, prime zone As on Regent Street are currently around £650/sq ft, about where they were in 2015.
Given considerable occupier fall-out on the back of the pandemic, vacancy rates have risen dramatically over the past year. Although all the major Central London markets (with the exception of the Kings Road) now have double-digit vacancy levels, all remain below the national average of 15.8%. Again, plenty of availability for those looking to acquire.
According to LDC, Oxford Street’s vacancy rate is around 13.5%, a very sharp increase on the previous year when the rate stood at 5.3%. And compare these two figures with a 15 year average of 2.6%. Regent Street’s and Bond Street’s vacancy rates are slightly lower at 13.1% and 11.0% respectively. Not only are those significantly higher than their 15 year historic averages (1.6% and 2.9%), between 2013 and 2015, both had zero vacancy rates.
Perhaps there is more comfort to be drawn from MSCI data, which points to a slowly improving underlying trend in Central London’s retail property market. Underlying retail rents in Central London declined by a further -1.7% q-o-q in Q2, significantly lower than the quarterly average of -2.3% reported in 2020. Similarly, some evidence of capital values bottoming out. Central London retail capital values slipped by a further -1.5% q-o-q in Q2, compared to a quarterly average decline of -4.5% in 2020.
Investment markets have stood more firm. Prime retail yields on Bond Street and Oxford Street are currently 2.75% and 3.50%. There has been some softening in pricing during the pandemic (ca. +25bps and +50bps respectively), but this has been relatively mild compared to other retail assets. Compare this with ca. +250bps for regional shopping centres, for example.
If not in place already, when will the recovery in Central London’s retail market really take root? The simple answer is when people (workers and tourists) return in sustainable numbers. When that will be is anything but simple. Despite all the permanent shift to WFH narrative, it seems reasonable to assume that the rate of worker return will accelerate considerably from the autumn. But the tourist market is unlikely to return in any meaningful way until 2022.
Central London’s retail market may be in a genuinely unprecedented place at the moment and many of the metrics on the Q2 Dashboard make for sobering reading. Although it is impossible to put definitive dates on a roadmap of recovery, it is important to understand differences in timeframe. Short-term, Central London will lag the rest of the country. But, in the longer term it will definitely rebound. The fortunes of London’s retail market are inextricably linked to the capital’s draw as a global city – and few people, surely, would bet against that.
2. What we learned from the BRC retail sales figures for July
It didn’t take long for the media to return to type. Having happily heralded a consumer boom post-lockdown, they are already back in doommonger mode, with very strong retail sales figures from the BRC prompting the usual overly-negative headlines. I thought COVID-19 was supposed to have changed everything – sadly, not the case, it would appear.
Total retail sales grew by +6.4% y-o-y in July, while like-for-likes rose +4.7%. Unlike previous months, y-o-y comparisons are not skewed by lockdown (i.e. “non-essential” retail was ‘open’ in both July 2020 and 2021). So, in fact last month’s growth was leveraged against a less-than-shabby comp of +3.2%. For the “pre-pandemic comparisons” brigade, retail sales last month were a massive +9.1% ahead of the same month in 2019.
Why the media consternation? Quite simply, July’s growth marked a deceleration on the previous couple of months. The BRC took to producing 2-year comparisons in May and June in an attempt to iron out any lockdown-induced skews and these months showed respective increases of +10.0% and +13.1%. So, July’s comparable figure of +9.1% is hardly an end-of-the-world deceleration.
July’s y-o-y figure of +6.4% was below the 3-month average growth of +14.6%, as well as the 12-month average growth of +10.4%. So what? What are people expecting? Surely not indefinite exponential growth? There was always going to be an initial surge post-lockdown but this would inevitably subside and give way to a more sustainable trend.
In fairness to the media, the BRC didn’t exactly play up its own figures: “The lifting of restrictions did not bring the anticipated in-store boost, with the wet weather leaving consumers reluctant to visit shopping destinations. Online sales remained strong, and with weddings and other social events back on for the summer calendar, formalwear and beauty all began to see notable improvement, so fashion outlets in particular saw a bounce back to pre-pandemic levels.”
But then again, as a representative body, the BRC does have an agenda and a vested interest, namely protecting and promoting the interests of its retail occupier members. The BRC is hardly going to present a glowing picture of health and positivity if they are 1. Lobbying for overdue change in business rates. 2. Representing retailers that have a host of unresolved legacy issues from lockdown, not least substantial rent arrears.
But that doesn’t really explain the BRC’s ongoing online cheerleading. “Online sales remained strong”? Actually, online sales fell back -0.4% compared to July 2020. A far less precipitous descent in online sales than other industry sources (e.g. IMRG -9.6%) are suggesting. I would venture that the official ONS figures will be somewhere between the two when they are released next week.
Online grocery growth must be heavily in negative territory, as online spending on non-food was actually up +0.6% in July (the lowest rate of growth in a very long time). Online penetration of non-food spend decreased to 48.4% compared to a rate of 54.0% recorded a year earlier. Notably, in key sectors such as clothing, online penetration rates have already fallen back in line with March 2020 levels. Maybe not such a permanent shift to online after all.
Total food sales were up +2.9%, or +0.8% on a like-for-like basis, decent figures given the reopening of hospitality over the month. In non-foods, the strongest growth was in categories that suffered most during the pandemic - clothing, footwear and jewellery & watches were the top three quickest growing categories in the BRC data in July. In contrast, in home goods there are signs the rapid acceleration in demand seen throughout much of the pandemic is starting to wane. Home office equipment began to fall after months of high sales, but categories such as furniture and household appliances continued to do well.
Some interesting 3rd party statistics from Mintel suggest that retail is still far from operating at full capacity. Mintel’s latest COVID-19 tracker shows 43% of consumers said they are worried/extremely worried about contracting the virus in July 2021, compared to 48% in July 2020. 32% of consumers said they were trying to limit their time in store in July 2021, compared to 42% in July 2020. Confidence is returning, but there is still upside.
The BRC figures are a helpful steer ahead of the much more detailed official ONS retail sales figures. I could stick my head on the block and pluck a figure from the air as to what they may say next week (OK, if you insist – values (exc fuel) +6.0% y-o-y), but I will say with 100% confidence that whatever the outturn figure is, it will be below the three previous months (April +37.9%, May +22.9%, June +9.6%).
But decelerating growth is not a disaster. It would be wholly unrealistic to expect post-pandemic peaks to continue indefinitely. The important thing is that we remain in sustainable growth territory for a prolonged period. If this time next year retail sales are “only” growing by 2-3% y-o-y, the UK consumer will still be in a healthy place.
Maybe “the new norm” should see the media avoiding hyperbole and taking a bigger picture view – one where monthly growth in retail sales of +37.9% is no more a triumph than growth of +6.4% is a disaster.
Stephen Springham
Partner – Head of Retail Research
+44 20 7861 1236
stephen.springham@knightfrank.com