High street retail joined retail warehouses (open A1 and restricted) in reporting a 25 bps downward shift in prime yields in March. This was the first compression in yields for this sector since November 2021. Shopping centres may join the fray in the coming months in light of mounting investor appetite. Improving footfall, renewed occupier demand, the yield play against other sectors and potential repurposing angles have all culminated to boost investor interest across the wider retail property spectrum, albeit the focus remains very much on prime assets with robust fundamentals.

March also saw an increase in the number of sectors reporting downward yield pressure, up from seven in February to nine. Despite this, deal activity for Q1 slowed significantly. Deal count for Q1 was 42.1% below the five-year quarterly average, the largest differential since Q2 2020 when deal activity fell 43.1% in response to the pandemic. In value terms, however, volumes were only 2.5% below the five-year average. We suspect this slowdown was in response to Omicron and reluctant sellers rather than reduced buyer appetite, as data for March points to improved activity. However, geopolitical tensions, inflationary pressures and its read-through for the global economy will no doubt exert an influence on investor confidence over the coming months.

What parts of discretionary spend are most exposed to the inflation squeeze?

UK inflation is currently running at a 30 year high due to spiralling energy costs, initially in response to the global emergence from the pandemic, then exacerbated by the Ukraine crisis. This is placing unprecedented pressures on household budgets. But, what parts of discretionary spend most exposed to this inflation/ energy cost squeeze?

One way to answer this is to look at historical spending trends during previous high inflation periods where other background elements, such as consumer confidence, GDP and unemployment rate were broadly similar. This is easier said than done considering that we have not experienced this degree of inflation in recent history. But, we did see significant increases in household energy costs in 2008 and 2012 (+19% and +13% in nominal terms, respectively) at a time when consumer confidence was at an all-time low, albeit annual RPI inflation was almost half that of current levels at 4.0% and 3.2%, respectively. So, what did consumers cut back on in 2008 and 2012?</p

There are a number of differences in spending trends across these two years. For example, more parts of consumer spending reported declines in real terms in 2008 than in 2012. There were also differences in those categories that reported declines; in 2008, spending on out-patient services saw the largest fall (-10.5%) whereas, in 2012, it grew 5.3% in real terms. While there were differences, there were segments that reported declines in both years. And, it is these segments that are likely to be the most exposed to the current inflation squeeze. These include spending on household furnishing, household equipment and other housing expenditure, which fell in 2008 and 2012 by 6.4% and 1.1%, respectively. Likewise, spend on food shopping, financial services (excl. insurance) and eating out also saw declines in both 2008 and 2012. Considering the scale of the current inflationary environment, we suspect more elements of discretionary spend will see declines, including those segments impacted by previous inflation squeezes.

There is a close correlation between Heathrow passenger numbers and London hotel occupancy, albeit airport passenger numbers are a mix of outbound/inbound travellers. The recovery that began in mid-2021 took a hit from Omicron at the end of last year, but this has been reversed in recent months with March reporting another improvement. For example, March passenger numbers at Heathrow were 36% below equivalent 2019 levels, the smallest differential since the onset of the pandemic. This is a promising improvement considering the geopolitical and inflationary headwinds that persist. This has had a positive read-through to hotel occupancy which is now 13% below equivalent 2019 levels. Headwinds continue but do suggest the recovery in international visitors to London, and that of its hotel and West End retail markets, is becoming more entrenched.