Retail 2021: the Show Must Go On
COVID-19 Market Update – 18/12/2020
6 minutes to read
Introduction
“The Show Must Go On”. The pragmatic title of our latest Retail Property Market Outlook (see accompanying link) which looks ahead to 2021.
2021 will be a far better year than the “annus horribilis” of 2020. But it won’t be a “Bobby Ewing in the Shower” scenario whereby we just erase what has happened under the pretext of it just being a bad dream. Beware the inevitable “return to pre-pandemic levels” headlines that will increasing come to the fore as the year unfolds. If we were destined to just go back to where we were before, it would take several years. But the reality is that we are actually on a different trajectory, a “new norm” to use popular parlance.
What is the “new norm” for retail? Flexibility and affordability are the two key watchwords for retail occupiers and, by extension, the two challenges for retail landlords. In practical terms, this will mean shorter leases and a push towards turnover rents, but both will require proactive collaboration and both sides have to play ball if this is to prove a workable and sustainable solution.
2021 will not be without further pain and aftershocks. CVAs will still occur and could actually accelerate in Q2 unless the potential meteor collision of the business rate holiday and moratorium on forfeiture ending at the same time is averted. A number of former CVA candidates will sadly graduate to full liquidation and the high street will inevitably lose some well-established names. Harsh as it may sound, this is the natural order of retailing and is nothing new. Retail remains the survival of the fittest and some operators are tangibly fitter than others.
In retail, consumer is king. And the consumer is likely to play his/her part in 2021. Contrary to every economic indicator, we expect the UK consumer to spend freely in 2021. For many, optimism may be tempered by employment concerns. Conversely, many others may find that constraint and restraint this year has left them with a significant cash surplus and pent-up demand going into 2021 is considerable. And there is comfort that in past recessions and times of hardship, the UK consumer has usually defied gravity and continued to spend.
“The high street is dead. Long live alternative use”. The narrative on retail’s demise has amplified over the past year. But this narrative remains as premature as it is simplistic. The UK retail industry is still worth £390bn a year and is not simply going to disappear. Change and evolve, yes, vanish into the ether, no.
A consumer willing to spend, a changing of the guard amongst occupiers, the emergence of a new breed to take the market forward, fewer but fitter operators, less but better floorspace, a renewed sense of purpose within town centres that have been re-engineered to reflect the future rather than the past. Positive counterpoints to all the pain the retail sector has had to endure in recent years and a blueprint for retail’s future.
Retail in 2021. The Show Must Go On. Maybe not as rehearsed, unscripted to a point, and largely improvised. But Go On it shall
Please do not hesitate to contact us to discuss any issues raised in the Report. Likewise, if you would like a presentation of the key findings with the Knight Frank Retail Team.
2021: Four Key Themes
1. The Consumer: Ripping up the Rulebook
Why we expect the UK consumer to defy economic logic and spend freely in 2021, with the retail sector a key beneficiary.
2. The Occupier: Changing of the Guard
Retail Darwinism at its most intense – 2021 will again be survival of the fittest amongst retailers. Goodbye to some of the old guard, hello to a new breed.
3. Retail Investment: Betting on a Recovery
Retail remains an investible sector, but can appear a lottery to the uninitiated. Where we think the smart money is likely to go in 2021 and beyond.
4. Retail Repurposing: Less is More?
Converting surplus and/or redundant retail floorspace to other undersupplied property uses may seem a no-brainer on paper, but the reality is often very different.
2021: 12 Key Messages
1. Less, but better floorspace. Fewer, but fitter operators. Retail structural change accelerated by COVID-19 will continue to play out in 2021. Considerable but necessary short-term pain for a stable and sustainable retail market going forward.
2. Against a more benign backdrop generally, occupier markets will stage a slow recovery as the year unfolds. Levels of retail trade are likely to have returned to something like “normalised” levels by the end of 2021.
3. In defiance of all economic logic to the contrary, the UK consumer will spend relatively freely in 2021. Free from the constraint of lockdowns and with considerable pent up demand, retail sales are forecast to grow by ca. 5% in 2021.
4. 2021 will be The Year of the Arrear – an estimated 50% of retail rents from this year remain unpaid going into the New Year. Resolution of this will be painful, with landlords either aggressively chasing what is due to them, or formally taking the pain themselves on their balance sheet.
5. Occupier markets face a potential meteorite crash at the end of March, with a risk of the moratorium on forfeiture and the business rates holiday being lifted almost simultaneously (exacerbated by Q1 rent day). A major pinchpoint with inevitable fall-out.
6. CVAs will sadly continue, particularly in the fashion sector which has been crippled by a toxic scenario of over-supply (too many operators, too many stores) and exceedingly soft consumer demand during 2020 (clothing sales down ca. -25%-30%).
7. Some CVA protagonists will graduate to full liquidation and the high street is likely to lose some well-established brands in 2021. But a “new breed” of operator will emerge to replace them over time as part of an evolutionary “changing of the guard”.
8. Flexibility and affordability will be the two defining forces of occupier markets in 2021. Manifestations of this will be shorter leases and a continued push towards turnover rents. But these need to be a two-way street to be effective, with retailers and landlords being transparent and collaborating.
9. Retail floorspace – increased separation between the wheat and the chaff in 2021 will drive both the investment market and potential development into alternative uses. Retail remains an investible property class, albeit one that now requires far greater discrimination than in the past.
10. Investors will continue to favour foodstores (-25bps to sub 4.00%) and retail warehousing (-50bps to 6.00%) and volumes will reflect that in 2021. OOT’s accessibility, flexibility and simplicity, plus perceived incubation from online, will continue to attract both institutional and PE investors.
11. Expect a flurry of retail repurposing exploration in 2021, although actual activity will not match the level of narrative as it is a more complicated play than many currently appreciate. Retail stock will be circled by a whole host of alternative uses, both commercial and residential, mainstream and specialist.
12. Many potential retail repurposings will not cross the “Four Great Divides” we identify, with value alignment invariably the most challenging. Those that do will largely be within Greater London and certain towns in the South East. Only in select locations will the stars fully align to make repurposing financially viable.
Seasonal Greetings – and keep spending!
Stephen Springham
Partner – Head of Retail Research
+44 20 7861 1236
stephen.springham@knightfrank.com