Spotlight: Retail Myths Exploded

Retail Myths Exploded
 
Retail Myths Summary

21 September 2015, words by Marie Hickey

What does this mean for UK retail property?

 

The retail myths being espoused during the height of the recession reflected a particular point in time, promoted primarily by wider macro-economic conditions. The return of economic growth, with the associated improvements in consumer confidence however, does not mean we expect the UK high street to return to what it was pre-recession. Things have changed, namely in the way consumers shop and with it how retailers look at their store portfolios. While some centres will bounce back, others may never truly recover.

On the whole, however, rental growth has returned. Seven of the 11 UK regions, covered by MSCI, reported positive annual growth in Q215 with a slowing in rental decline across the remaining regions.

 

"The role of the physical store in supporting online sales growth is rising"

Marie Hickey, Savills Research

For 2016 we expect all UK regions will report positive rental growth, with average annual growth of 2.3% per annum through to the end of 2019 nationally.

Yet, on a centre basis, it will be a relatively mixed bag. Central London is expected to top rental growth projections over the next four years (see Figure 4). The other major regional centres do not feature particularly highly with Manchester forecast to be the top performing major city ranking 12th across the 92 centres we track with 2.5% per annum.

Rather it is the smaller affluent centres that are expected to report the greatest uplift in rents including some London suburbs. Outside of Greater London the top performers are forecast to be Winchester, Bath and Chichester with 3.4%, 3.2% and 3.1% per annum respectively.

Yet, the core secondary pitches, particularly in the key regional cities, may see rental growth in excess of this. Prime Zone A rents across the major UK cities have reported average annual increases of 7.3% per annum over the last two years. However, as availability constraints on these prime pitches intensify we expect some overflow demand to core secondary pitches and in turn rental growth.

FIGURE 4

Top 25 retail centres by rental growth projections
(average annual growth 2016-19)

 
Figure 4

Source: RealFor

On the lead up to the recession rental growth on core secondary pitches in the major cities outperformed the prime pitch by an average of 160 basis points per annum. We may see a similar pattern emerge over the next 18 months due to its more affordable rental profile and slower recovery seen to date.

With occupational demand and in turn rental growth finally making a come back, the question is what will support this going forward? Improving consumer confidence and in turn retail spend will be key. However, the slowdown in the Chinese economy and its potential impact on the UK economy may temper this.

The continued growth in online retail and the rising importance of physical stores in supporting this will also be a potential driver. As a result we could see more pure-play retailers enter physical stores. Others may explore a network of smaller stores that act as ‘shop windows’ that allow consumers to test product and pick up orders. A format Argos is currently trialling.

For some locations it may mean store size requirements may increase. Click-and-collect could see retailers accommodating an ever growing volume of stock in-store. However, this is likely to be confined to those key retail centres that are more likely to act as click-and- collect hubs.

Value retailing will continue to be the powerhouse of occupier expansion. The recession has had a long lasting impact on UK shopping habits, which has meant consumers remain enamoured with Value. As a result Value retailers are pursuing significant portfolio expansion.

For example, Poundland and Lidl are planning on doubling their UK portfolios. It will be this sector that will offer the best lifeline to those high streets that are yet to see any recovery.

Aspirational retailing will provide an added boost to occupational demand in key regional centres and market towns. Continued economic growth will encourage brands to expand store portfolios, particularly those international entrants who are looking beyond London and the South East for opportunities. However, unlike what we saw prior to the advent of online retailing, this expansion will be more considered and restrained.

 

 
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Key Contacts

Marie Hickey

Marie Hickey

Director
Commercial Research

Savills Margaret Street

+44 (0) 20 3320 8288

 

Tom Whittington

Tom Whittington

Director
Retail Research

Savills Manchester

+44 (0) 161 244 7779