Retail steels itself for another rocky year

Several landlords and asset managers are forecasting another difficult 12 months for retail, following a year characterised by failed shopping centre merger bids, plummeting valuations and a slew of high-profile company voluntary arrangements. David Atkins, chief executive of Hammerson, says: “I’m under no illusion that the UK retail market is tough. But uncertainty in our market is nothing new, and we’ve faced a number of challenges in the decade since the financial crisis. “Both retailers and retail destinations need to be on top of their game, and a more agile approach to tenant curation is required.” Christophe Cuvillier, chief executive of Unibail-Rodamco-Westfield, expects that traditional retail will continue to struggle against the tide of e-commerce, as well as “very rapid” business rates increases. “However, in this challenging context, London will always remain London: we are extremely confident about the mid- to long-term dynamism of the city,” he affirms. In 2019, URW anticipates that infrastructure launches – specifically, the opening of the Elizabeth Line at Stratford City – will boost shopping centre footfall. In addition, a few more years down the line, the shopping centre landlord aims to bolster its UK retail offers with more office and residential projects. Meanwhile, Andy Bruce, global head of real estate at Linklaters, expects the volume of CVAs to both rise and potentially pose issues for landlords this year: “While CVAs give retailers the chance to tackle some of the inherent problems, landlords can often be exposed, forced to write down rent arrears, and that has a knock-on effect throughout the business. “I expect the UK high street will remain challenged in 2019, and we will continue to see an increase in CVAs, so landlords will face issues.” Hugh Seaborn, chief executive of Cadogan, also forecasts that the year ahead will herald more retail failures. He adds: “Will the identity of these surprise us? Probably not.” Silver linings Despite the gloom, investors will be looking out for cheap assets as well as opportunities overseas, while retailers and landlords will need to innovate to thrive. Mark Robinson, co-founder of Ellandi and president of Revo, paints a more mixed picture about the year ahead: “There is no denying that 2019 will continue to be a tumultuous time for retail property as huge structural change continues to play out. “However, positives to look out for are increased volumes of investment transactions and the winners in the retail occupation world continuing to take space on fantastic terms. The potential impact of the government’s Future High Streets Fund will also become clear.” Geographically, Atkins predicts that mainland Europe – which accounts for nearly 50% of Hammerson’s portfolio – will outperform the UK in 2019, while he expects premium outlets to generate “industry-beating returns”. The use of technology could also create new opportunities. Seaborn predicts that the retailers and restaurant operators that will thrive “irrespective of the Brexit outcome” will be those that deploy technology to deliver bespoke shopping and dining experiences. Bruce expects that proptech will continue to shape the direction for retail, as well as logistics and construction – including developments in big data software, smart building technology and driverless cars. Landlords will certainly be hoping that the year ahead will bring more innovation to drive experiential shopping to new heights. Atkins, for one, highlights that Hammerson has “an ambitious target to crack frictionless shopping” in 2019. He comments: “‘Big day out’ shopping trips will continue to dominate and drive leisure spend, with customers wanting more ethical fashion and spending more on a smaller selection of better-quality items.” To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette Only Mike Ashley and sheds will defy the retail gloom Overstretched retail estates are locked into long-term and inescapable leases with upward-only rental covenants and extortionate business rates – set against a backdrop of consumers shifting their shopping habits to online and the UK’s looming exit from the EU. It is therefore quite likely that the negative headlines in retail will continue this year. Since the start of 2018, the raft of CVAs and administrations in the sector has culminated in an expected 1,600 store closures across the UK, with more than 18m sq ft of prime retail real estate vacated. There are certain sub-sectors that are likely to face more pressure than others. The fallout from department stores will continue, while the future of House of Fraser and Debenhams could come to a head, with a merger being one solution. Food and beverage, value and fashion brands will come under more strain as overstretched markets begin to weed out weaker offers as retail Darwinism bites. Meanwhile, self-appointed “saviour of the high street” Mike Ashley will continue to try to expand his empire. With retail property values coming under the microscope, investment could prove very lucrative for him personally. The traditional REITs may re-enter the shopping centre after a largely inactive 2018, which will be dependent on the result of Brexit, as will be any potential takeovers of REITs themselves. With November high street footfall being the worst since the 2008 recession and internet spend anticipated to move from 20% to 35% in the next five years, the challenge for landlords and retailers in 2019 will be how to get consumers onto the high street in the first place. The logistics sector, which is so intrinsically bound to retail, will encounter its own challenges and opportunities. Much has been made of the lack of warehouse space on the market, with the demand for last-mile units at an all-time high because of increases in internet spend and Brexit stockpiling. The sheds market has been the one property sector immune from Brexit uncertainty since 2016 and will continue to provide sanctuary for investors seeking solid returns. The challenge for developers will be how to satisfy a market with such voracious demand. We will certainly see many more mixed-use, multi-level warehouses as the sector comes into direct competition with the residential sector. To send feedback, e-mail james.child@egi.co.uk or tweet @JamesChildEG or @estatesgazette