UK retail consumer and occupational trends

Following the one-year anniversary of the initial UK lockdown, it’s clear to see the long-lasting damage across the retail market caused by the pandemic. However, not all retail has been affected evenly and while headwinds do still persist, there are a growing number of reasons to be optimistic.

The successful vaccine rollout process across the UK has allowed the government to release a road map to reopening the economy, with perhaps the most important date for the retail diary being 12 April, when non-essential retail reopened.

A clearer picture of when other parts of the economy will begin to reopen, coupled with the expectation that this will be the final lockdown, has improved the consumer environment substantially. According to GfK’s March consumer confidence survey, the index regarding general economic outlook for the next 12 months improved to -17, the highest level since October 2016 (see chart below).

Importantly for the retail market, the index relating to climate for major purchases experienced an eight-point improvement compared to February levels, albeit still relatively subdued at -11.

What’s particularly promising from the survey is the index for personal financial situation for the next 12 months, which has improved dramatically since March 2020, now matching the post-GFC peak of +10. This is in line with a significant growth in household savings over the same period, with Bank of England data suggesting UK households have saved over £180 billion during this time.

Early footfall improvements point to promising reopening recovery

As the UK approached the retail reopening date, footfall had been steadily improving each week, helped largely by a cocktail of better weather, bank holidays, easing of social mixing and vaccination confidence.

The reopening of hospitality and non-essential retail on the same date provided high street and shopping centre locations with a substantial kick-start to support recovery. During the week beginning 12 April, footfall on high streets and shopping centres increased 93.2% and 126.6% respectively, compared to the week prior, according to Springboard.

The ongoing work-from-home guidance will continue to support the trend of hyper-localism, benefitting local high streets. As a result, market towns and outer London high streets are far closer to pre-Covid levels, at -19.5% and -20.4% respectively, compared to the UK high street average of -34.9%.

While the removal of the predetermined ‘essential’ and ‘non-essential’ retail categories will begin to help balance footfall levels across each retail type, it’s likely that retail warehouses will continue to outperform due to the drive-to convenience, outdoor setting and therefore perceived Covid-safety.

The easing of overnight travel restrictions from 17 May onwards will undoubtedly generate a boost in footfall across key UK coastal staycation markets, in similar fashion to the late summer months of 2020.

Reopening costs alongside reduced fiscal support could spark further insolvency activity

The number of units affected by CVAs and administration increased dramatically in 2020, amounting to more than both 2018 and 2019 figures combined. According to LDC, last year saw a net store decline of 11,319, marking the highest decline on record. However, it’s worth noting that the actual number of closures (50,379) was down -6.8% year on year (YoY). This reduction in total closures is primarily a result of the substantial government support in place, providing vital breathing room for many operators.

The reopening of the sector over the next few months will provide some retailers with a long overdue injection of revenue. However, the winding down of fiscal support (notably the furlough scheme and eviction moratorium), coupled with a return to usual operating costs will create significant financial headwinds for parts of the market. This process could therefore spawn further insolvency activity as we move through 2021.

On the other hand, there are a great number of retailers who have streamlined their business models over the course of the last 12 months and can therefore operate more profitably amidst lower levels of footfall compared to pre-pandemic. This right-sizing, whether it be in the form of physical store portfolios, further cohesion between online and offline, improving supply chain, reducing ancillary costs or staffing numbers, might just be enough for parts of the market to make a prompt return to operating profitably.

Strong Q1 2021 deal count, as retailers set eyes on reopening date

Despite the closure of non-essential retail for almost the entirety of the first quarter, Savills recorded a 29.3% uptick in the number of new lettings YoY in Q1 2021. This bucks the trend of reduced deal activity that was experienced throughout the majority of 2020.

An element of certainty in response to the vaccine rollout and confirmed reopening dates generated added interest from well-capitalised retailers, resulting in multiple offers for some of the better-positioned assets. This may be the reason for the marginal decrease in average rent-free periods for new leases signed in Q1 2021 (6.6 months), compared to the 2020 average (6.9 months). Nonetheless, the Q1 2021 average rent-free period remains 14.4% higher than pre-pandemic levels.

Increased deal count has provided more insight into rental tone across the wider market, with headline rents declining -15.3% YoY, on a rolling four-quarter basis. Over the same period, net effective rents reported a fall of -14.8% YoY, representing a marginal improvement compared to Q4 2021.

This brings through the first full four-quarter period since the onset of the earliest UK lockdown. As a result, we can expect YoY figures to begin to plateau going forward, in line with the first anniversary of the onset of the pandemic. However, this will rely heavily on the level of insolvency in response to reduced fiscal support and its impact on vacancy over the next six months.

UK retail investment market

Spring showing some green shoots of a return to more normal conditions

The first quarter of 2021 has shown some very early shoots that could point to a more meaningful recovery in the shopping centre investment market over the remainder of 2021.

£247m of assets were sold in the first three months of this year, substantially up on the £107m that was sold in the traditionally strong final quarter of 2020. At present, we estimate that there is a further £241m of shopping centre investments under offer, and just over £700m of assets in the market.

While the volume of trading remains substantially down on a normal quarter, the factor that leads us to feel more optimistic about the remainder of this year is the widening pool of buyers that are active in the market. While 2020’s reasons for purchase were almost entirely about change-of-use, this year we have seen buyers looking at shopping centre investments for more than just repurposing reasons.

We have also seen the beginnings of some upward pressure on pricing for repurposing opportunities, with the recent sale of the Fishergate Shopping Centre in Preston being typical of this. This 10-acre site close to the station was initially marketed at £5m, and was eventually sold for £8.25m less than two weeks after going under offer.

The more secure income part of the market remains popular, characterised by foodstore-dominated schemes and outlet centres.

The biggest question for the remainder of 2021 lies around core shopping centre assets that dominate their catchments. There have been very few of these marketed over the last 12 months, with owners unwilling to bring them to the market in case of overly opportunistic price discovery. However, with non-essential retail now having reopened in England we believe that footfall and trading data will rapidly emerge that will enable buyers to identify those centres that are still crucial to their local catchments.

While there will undoubtedly be further retailer failures and CVAs over the remainder of this year, our data on store openings that we highlighted earlier in this report indicates that there is still retailer demand for key centres and high streets across the country.

As this clarity on the shape of the retail recovery begins to emerge over the summer we expect that some investors will begin to focus in on prime shopping centres where they feel that pricing has overcorrected. This would be very typical of the normal investment cycle, and if we look back to the period immediately after the global financial crisis (GFC), prime shopping centre yields peaked at 7.25% in August 2009 and had fallen to 6.00% within 12 months.

Coincidentally our current prime shopping centre equivalent yield stands at 7.25%, and while we are not suggesting that the pace of recovery in pricing will be as fast over the next 12 months as it was post-GFC, we do believe that the prime end of the market is now looking very cheap in a historic context.

The centre that is currently in the market that has the most ‘prime’ characteristics is the Touchwood Centre in Solihull. While it is not a super-regional, it has a dominant role in its catchment, as well as a sustainable mix of tenants. It is currently being marketed by Lendlease for £130m, indicating an initial yield of around 7.5%. We understand that this asset is under offer at a yield of over 9% and thus may well represent the high water mark for yields this cycle, and further heighten the perception that parts of the shopping centre market are now looking comparatively cheap.

The change in direction in pricing in the shopping centre market will be slower than we have seen in previous cycles because there are still many uniquely Covid-related questions to be answered, even before we return to the early 2019 questions around structural change in retail. While the moratorium on evictions now has a hard end date on 30 June, the government’s current consultation on what could happen next may well muddy the waters through the remainder of 2021. It is possible that the eventual decision could be that some elements of the commercial property sector, most notably retail and leisure, need a tapered end to protection. If that were to be the case, then we believe that it will remain difficult for buyers of shopping centre assets to commit without taking control of the existing arrears and potential rent guarantees in place from the vendor.

All this having been said investors are definitely edging closer to revisiting what they defined as a good centre in early 2019, and discovering that pricing on these assets is now extremely attractive. Dominant centres where rents have rebased, and retailer demand has been sustained will once again begin to be brought to the market in the second half of 2021, and not only will this swell transactional volumes, it will also provide some clarity on where prime yields actually sit.

High street shop investment

The unit shop investment market has also been showing some green shoots in the first quarter of 2021, both in terms of the volume of activity and the widening pool of buyers with different motivations.

Private investors and property companies have remained the dominant buyers of the segment, and change of use has remained the most common rationale for purchases. However, the last three months has also seen an increase in activity in core locations such as outer London and the wider South East of England where the buyers’ motivation is more countercyclical.

The defensive end of the segment, characterised by banking halls and foodstores, remains the domain of the keenest yields. However, as the summer proceeds, we expect to see a plateau in our prime yield, followed by the beginnings of some downward pressure in the primest locations.

The latest edition of Re:Imagining Retail is out now – read issue 2 here