Retail Revolutions

Retail Revolutions
 
Outlook

27 September 2017, by Marie Hickey

Retailer confidence to make a tentative return in 2018

 
 
2018 outlook in numbers

Retailer activity to improve

Occupational demand, on the whole, stalled this year on the back of Brexit and the subsequent operational cost pressures this generated. We expect these cost pressures will start to subside throughout 2018 translating into improved retailer confidence and occupational demand, albeit this will be tentative and largely focused on prime retail locations initially.

Rental growth to be subdued but will improve post 2018

All UK rental growth is forecast to be relatively subdued over the next two years, with average growth of 0.3% per annum forecast for 2017 and 2018. Beyond this, growth is forecast to improve to 1.4% per annum through to the end of 2021.

The best performing parts of the retail market will continue to be destination retail locations with All Central London and out-of-town destination shopping centres forecast to see average annual rental growth of 2.2% and 1.5% per annum respectively between 2017-2021. We also expect to also see strong performance in more 'convenience' locations where trading performance is robust and total occupational costs are more affordable.

Rightsizing picks up pace

One key trend for 2018 will be the growing acceptance that there is perhaps too much retail floorspace in the wrong locations. Rightsizing will not just extend to total provision but also store sizes in some instances.

Rightsizing unit formats, primarily through subdivision of larger units, is nothing new in secondary and tertiary locations. However, in prime retail locations, particularly in London and the South East, it could become more common. Retailer demand in prime locations will continue to be skewed towards large flagship stores over the longer term. Yet, with many retailers looking to drive their online platforms they are now considering their store portfolios more carefully. This is likely to be more pronounced in prime locations as the cost associated with operating these stores has increased significantly, particularly in the wake of the recent business rate revaluation.

A slight shift towards smaller formats does have its benefits to landlords. Firstly the reletting risk is often lower as the pool of potential occupiers is larger. It can also help to improve the vibrancy and attractiveness of a location to shoppers as smaller stores can mean a greater number and variety of retail brands.

Shorter leases seen more favourably

Average retail lease lengths have been shortening for a number of years. The introduction of IFRS 16 in January 2019 could see it shorten further. The new IFRS accounting standards will bring all leases onto a company's balance sheet, effectively increasing assets and in turn liabilities particularly for large retailers with sizeable estates. This could further enhance the attractiveness of shorter leases to retailers as it will minimise liabilities. For prime retail locations, however, we believe there will remain a preference to secure longer terms.

Shorter lease lengths does pose some potential valuation issues. On the flip side, it does offer some operational advantages to landlords, particularly in shopping centres, as it provides greater flexibility around retailer mix.

New types of retail occupiers and formats

Retail space occupiers are set to move beyond traditional retailers. Manufacturing and car brands, such as Dyson and Tesla, have already started to appear in high footfall retail locations. Unlike traditional retailers where the store is required to generate direct sales, for these occupiers the store is envisaged as a way to raise brand awareness and to improve customer engagement. Likewise we also expect to see some traditional out-of-town retailers move onto the high street with smaller concepts.

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Key Contacts

Marie Hickey

Marie Hickey

Director
Commercial Research

Savills Margaret Street

+44 (0) 20 3320 8288