UK retail sales Q4 2022 – overreaction personified?
This week’s Retail Note focuses on Knight Frank’s Q4 2022 Retail Monitor. A turbulent quarter across the board, but thankfully one where the prevailing gloom is increasingly proving misguided.
7 minutes to read
Key Messages
- Q4 2022 dogged by negative sentiment
- Overhang from the disastrous Autumn mini Budget in September
- Real estate investment markets at the sharpest end
- Consumer and occupier markets prove more resilient
- Consumer confidence slowly improving (+7pts in Q4)
- Retail sales values hold up (+3.6% in Q4)
- But retail sales volumes under pressure (-6.1% in Q4)
- Very limited retail occupier fall-out
- Retail vacancy rates decline for a 5th successive quarter (to 15.3%)
- Some evidence of retail rental growth (+0.2%)
- Driven by retail warehouses (+1.1%), rather than shopping centres (-0.9%)
- Investment volumes severely depressed by interest rate increases
- Retail investment volumes of £1.13bn in Q4 (-65% down on Q4 2021)
- Retail yields softened by +25bps to +50bps in Q4
- But correction was swift and decisive, unlike other CRE sectors
- Retail yields already stabilizing and, in some cases, compressing again
- Retail property achieved a negative total return of -9.24% in Q4 2022
- But better / less bad than other CRE sectors (e.g. industrial -18.36%)
- Monthly trends show a distinct uptick in retail property market performance
- Shopping centres achieved a positive total return in Dec (+0.01%)
- This has accelerated in 2023 (+0.86% in Jan)
- Underpinned by capital growth (+0.06%) and income return (+0.79%)
That was then, this is now. Thankfully, the ‘now’ feels much better than the ‘then’, the ‘then’ being the final quarter of last year. While few are under any illusions as to the economic challenges that lie ahead this year, the near paranoia that gripped investment markets particularly at the tail end of 2022 is slowly dissipating.
The spectre of recession spooked investors to the point of severe over-reaction ahead of Christmas. This caution and correction is reflected in many of the metrics in our Q4 Retail Monitor, which provides a very telling snapshot of consumer, retail occupier and investment markets. Thankfully, sentiment has improved considerably post-Christmas and there is a growing feeling that things might not actually be as bad as all that.
The consumer – muted rather than in meltdown
The disastrous Autumn mini Budget actually fell in Q3 (23 September) but many of the aftershocks spilled over into Q4. The appointment of Rishi Sunak as the UK’s third PM of the year in October did create a slightly more stable political backdrop (everything being relative). But his appointment did result in a discernible improvement in consumer confidence. Sentiment strengthened each consecutive month of the quarter, rising +7pts overall in Q4. Despite numerous well-documented pressures on household budgets, the outlook on personal finances was uplifted +11 pts vs. the outlook on the general economic situation (+15 pts).
Confidence on personal finances continues to track above confidence on the general economic situation – good news for the retail sector, in that the former tends to correlate more closely with actual retail spending. As has been documented in a number of previous Retail Notes, retail sales have tended to hold up surprisingly well in the face of the cost-of-living crisis, albeit with significant pressure on volumes.
That said, the official ONS retail sales figures for Q4 were surprisingly downbeat, contradicting virtually all other retail newsflow of strong Christmas trading. Seasonally adjusted sales values (amount spent) allegedly grew just +3.6% in Q4, a slight deceleration on Q3 levels (+4.1%) and substantially below the non-seasonally adjusted and BRC figures of +6.0% and +6.9% respectively, both far more reflective of general market trends. Volumes (items purchased) were predictably impacted by inflation, declining -6.1% (or a more modest/credible -2.9% on a non-seasonally adjusted basis).
Annual retail sales for 2022 broke all records. Sales values (amount spent) grew +4.8%, the highest level of growth since 2004 (excluding the artificial post-COVID spike of +6.2% in 2021) and above 10- and 20- year averages (+3.4% and 3.2% respectively). In contrast, sales volumes (amount purchased) fell -3.4%, the worst annual performance since 1991. Grocery sales were respectable (+3.1%) and above the 10-year average (+2.4%), whilst non-food saw double digit growth for a second consecutive year (+10.2%).
In a nutshell, despite all inflationary pressures and the ongoing cost-of-living crisis, consumers continued to spend in Q4, almost as an act of defiance.
Occupier markets likewise resilient
The prospect of recession elevated fears of major retail occupier fall-out, some analysts even predicting a major bloodbath ahead of Christmas. Which simply did not materialise.
Overall, occupier distress in 2022 was largely concentrated amongst the online pureplayer community, as evidenced by the ratio of failing companies to stores affected (2022: 49 failures affecting 2,318 stores, vs. 2020: 54 failures / 5,214 stores). Looking forward, the Knight Frank Retailer Watchlist identifies just 58 of the Top 300 retailers as being ‘at risk of failure’ (19%). Of these, 22 are online-only operators. Encouragingly, a total of 191 (64%) present ‘no immediate apparent risk of failure.’
Occupier markets generally held steady despite increasing ‘cost of doing business’ pressures. Overall retail vacancy rates improved for a fifth consecutive quarter in Q4 2022 to 15.3%. Just a small number of physical retailers entered administration (e.g. Shuropody, M&Co, AMT, Joules) – several securing the future of their stores via pre-pack agreements.
Limited occupier fall-out, a declining vacancy rate, there are even nuances of retail rental growth (remember that?) in some markets. Overall retail rents actually grew +0.2% in December, driven by retail warehousing (+1.1%), rather than shopping centres (-0.9%) and high street shops(-1.7%).
An improving trend, a positive direction of travel and even some instances of anaemic growth. As much as we can hope for at this stage.
Investment – shocks and swift repricing
Investment markets generally were are the sharpest end of macro-economic movements in Q4. Investor sentiment across all CRE markets was deeply subdued, the aftershocks of the mini Autumn budget compounded by mounting fears over impending recession.
Accordingly, none of the Q4 headline metrics make for good reading. The RICS Commercial Property Sentiment Index weakened to -15 pts (vs. -11 pts in Q3). Retail yields moved out a further +25bps to +50bps, as capital values fell into negative territory (-9.7%). Retail investment volumes registered just £1.13bn in Q4, approximately -65% down on the same quarter in 2021 (£3.27bn).
In terms of volumes, high street deals ostensibly led the way, accounting for nearly half of all retail investment (£560m) in Q4 – although Lazari Investments’ trophy deal at 63 New Bond Street heavily skewed the numbers (£430m). Other notable deals included a £76m portfolio deal comprising One Stop Shopping Centre in Birmingham’s Perry Barr and Corby Town Centre, highlighting the strength of community-focused assets in locations with robust rental and population growth expectations. Investment in retail warehousing paused for breadth in Q4, but has already resumed in 2023 on the back of swift but decisive price correction.
Amidst all the market turmoil, the emergence of retail as the top performing CRE sector has largely flown under the radar. It is not immediately apparent in figures for Q4 2022 as a whole. All retail achieved a negative total return of -9.24% in Q4, less bad than other CRE sectors rather than intrinsically good. But the monthly trends are far more positive. In December, all retail total returns improved by 270bps to -2.06%. Shopping centres actually reported a positive total return (+0.01%), the only mainstream real estate asset class to achieve this distinction.
Nor has this ‘retail property revival’ proved a one-off. In January, retail warehouses also achieved a positive total return (+0.02%), while the improvement in shopping centres accelerated considerably (+0.86%). Tellingly, this performance was driven by a combination of positive capital value growth (+0.06%), not just income return (+0.79%).
Shopping centres the star performing property class – who’d have thought? But sadly, we’re unlikely to see a rush of investor interest until debt markets stabilize, certainly for larger lot sizes.
Some perspective
The prevailing pre-Christmas paranoia sweeping the market now seems a distant memory. Within retail, Christmas panned out far better than virtually anyone expected and sentiment has ben re-visited as a result. The threat of recession was also averted with a better-than-expected Q4 performance in the macro-economy. But recession may still become a reality. But even if it does, there is enough to suggest that it may play out very differently and less severely for the retail sector than those that went before.
Maybe – just maybe – it might not be quite as bad as everyone was predicting at the end of last year. ‘Now’ feels a lot better than ‘then’.