RETAIL PROPERTY SECTOR

In recent years, the retail property sector has endured a series of crises, arriving one after the other. This has been too much for some companies; in June 2020, the UK’s largest shopping centre owner Intu fell into administration after its rental income streams dried up as the first national lockdown forced its tenants to close their doors. Following on the heels of COVID-19, Russia’s invasion of Ukraine, soaring inflation, rising interest rates and continued competition from e-commerce giants such as Amazon and Asos have compounded an already grim picture.

Looking ahead to 2023, the landscape for the sector can charitably be described as challenging. A report from the Centre for Retail Research found that 17,000 shops in the UK closed last year, the highest figure in five years.

The predominant force behind the closures is rationalisation – the process of closing branches which are unprofitable, too large, or poorly located – rather than insolvency. The consequences may not be a net loss, as retailers are likely to open new units at locations better positioned for growth. Marks and Spencer has announced it will remove 67 of its larger stores over the next five years, while at the same time opening over 100 Simply Food units. This forms part of its growth plan to increase grocery sales by selling a wider offering in dedicated food stores. Professor Joshua Bamfield, director of the Centre for Retail Research, said that he expected this trend to continue into 2023.

There are some glimmers of hope for the sector, however. Chancellor Jeremy Hunt’s autumn statement threw high street retailers a lifeline when he announced a revaluation of commercial properties which awarded bricks and mortar premises a reduction in their business rates. Department stores and large supermarkets were the chief beneficiaries of the reduction. Conversely, rates for large warehouse and logistics facilities have been substantially raised. This goes some way to address an understandable complaint from traditional retailers that they pay an unfair share of business rates while leaving the online giants with a much smaller burden. Property consultants Altus have calculated that the rateable value of Oxford Street’s Selfridges will fall from £30.5m to £16.8m – a reduction of almost 45%.

The benefit of the downward revaluations will also be felt sooner than expected. Downward transitional relief is usually phased in over three years, but the planned changes will take place in one fell swoop on 1st April this year. Small shops will also see a benefit, as the business rates discount for smaller retailers will increase from 50% to 75% and be extended for a year.

Another potential tailwind for the sector has been surprisingly strong Christmas results from a variety of high street chains. The likes of Next, Boots and The Perfume Shop have all reported comfortable increases in like-for-like sales in the final quarter of 2022. These statements are not the complete picture, however, as they are unaudited and are something of a platform for retailers to put out whatever message they might want to send.

Convenience stores saw a boost during the COVID-19 lockdowns as consumers stayed local, but trade fell back to pre-pandemic levels as public life returned to normal. Convenience store chain McColl’s could not survive, however, and fell into administration in May last year, with senior creditors being owed £160m. A bidding war followed, with Morrison emerging victorious over EG Group, a petrol station chain partly owned by the Issa brothers who also own rival supermarket Asda. Morrison announced plans to close 132 lossmaking stores and bring most of the remainder under its of all shapes and sizes – from digital natives looking to ‘test the waters’, through to large, established names wanting to inject new energy into their brand experience.’

While the headwinds may be varied and substantial, looking ahead there are opportunities in the retail property sector. All the major supermarkets are looking to open new convenience branches, while challenger discounters Aldi and Lidl plan to open 100 and 200 stores respectively over the next two years. The value end of the sector is growing, with the likes of Greggs, Home Bargains and B&M all looking to increase their presence in 2023 as they benefit from consumers reducing their household expenditure. At the other end of the scale,

‘Morrisons Daily’ brand. Asda also has plans to open 300 new convenience stores over the next four years, mostly in the South where its presence is smaller. A forecast from the Institute of Grocery Distribution predicts that the sector is set to grow by 13% in five years.

Commercial landlords have begun to offer more flexibility in their leasing agreements with tenants. Landsec, owners of Bluewater and Trinity Leeds, has launched a suite of lease options, with terms as short as one day. Nik Porter, Head of Retail Brand Management at Landsec, said ‘A traditional, onesize-fits-all leasing model is no longer fit for purpose. Our new products reflect this new reality. There is something for brands the outlook for high-end goods is promising as wealthier consumers can weather the cost of living crisis and continue to spend as before. Sephora, the French cosmetics retailer backed by luxury goods giant LVMH, is making a return to London after 18 years. With many challenges to contend, both retailers and their landlords will have to be agile and adaptable when navigating consumer behaviour as they consider the uncertain year ahead of them.

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