UK Shopping Centre and High Street Spotlight Quarter 2 2018
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Savills World Research UK Retail UK Shopping Centre and High Street Spotlight Quarter 2 2018 Image: Whitefriars, Canterbury SUMMARY ■ Consumer trends and confidence ■ Shopping centre investment remain fairly muted, with the recent turnover in the first half of 2018 was rise in the base rate unlikely to impact 39% down year-on-year. This is being saving or borrowing behaviour driven by uncertainty around the significantly. occupational outlook, and a mismatch between vendor and purchaser ■ The occupational market remains expectations on price. "Increased volatility in the similarly flat, with most retailers struggling with the twin effects of ■ A similar story of mismatched occupational sphere has last year's weakening margins and expectations is true in the high street compounded the existing the uncertainty about Brexit going shop investment market, though the forwards. first half investment volume was in line uncertainty in investment with year-on-year. ■ Landlords are also increasingly markets as volumes cautious about the future, and are ■ We expect the investment market have drifted further, but more prepared to offer better terms to to remain quieter than normal for maintain occupancy levels. the remainder of 2018. However, opportunistic investors are opportunistic buyers are out there and starting to gather." will strike once they see value. savills.co.uk/research 01 UK Shopping Centre and High Street Spotlight has weakened in recent months, the The consumer economy responses to the question on people's Looking ahead we expect the balance With August seeing the MPC finally perceptions of the outlook for their of power in the occupational market raise interest rates to 0.75% there will own finances has been more positive to remain firmly in tenant's hands undoubtedly be some who see this as in the first seven months of 2018 than for the foreseeable future. While yet another straw loaded onto the back the same period in 2017. retailer's operating margins are of the fragile retail sector. However, unlikely to improve noticeably in the the forward guidance remains that The retail occupational next 12 months, some are in a more any further rises will be "gradual" market dominant position than they were a and "limited", so we do not see this After the turbulence of 2017 and year ago because of the failure of their anything other than a statistician's early 2018 the occupational market competitors. This, in time, should moment. has entered a period of relative stasis improve profitability, and in turn deliver (albeit at a low level). The last few a degree of comfort for any retailer Indeed, commentary around interest months have seen few good or bad who is considering expansion. rate rises often over-focuses on changes to the retailing environment, what it means for the comparatively which means that operating margins However, we expect that the overall few people who are on variable rate remain tight. tone of the retail occupational market mortgages, and ignores the positive will mirror the current stasis until real impact of the far larger number of Most retailers are as confused as every clarity emerges around what type of savers that should get more interest other industry as to what the numerous Brexit we are facing. from their savings than they have vague Brexit scenarios might mean for received for nine years. their businesses going forward, and Shopping centre this means that the easiest decision investment While the household savings ratio has to make is to not do anything too The shopping centre investment picked up a little from its record low market’s malaise has continued into this time last year, UK consumers are dramatic. 2018, after 2017 saw the lowest still only saving 4% of their earnings, volumes since 2008, with only £1.69 while borrowing at an enthusiastic Rationalisation continues across billion of shopping centres trading over level. If interest rates do continue most segments of the retail market, the course of the year. Volumes for the to rise (without substantial earnings with limited store openings underway first six months of 2018 reached £592 growth), then we do expect that or planned. Where retailers are million, down 39% on the same period borrowing will slow and this will drag expanding or consolidating into new last year, and indicating that 2018 on retail sales. stores they are finding that landlords volumes will remain some way below are becoming increasingly flexible on 2017’s figures, and significantly short However, the recent very weak trend rents and terms, and we expect this to of the long term average of £3.8 billion. in retail sales volumes did strengthen remain the tone of the market for the sharply over the last quarter, with the foreseeable future. Nine transactions completed in the three month on three month rate rising second quarter of 2018, equating to from -0.3% to +2.0%. While some of As we commented upon in the last an aggregate capital value of £260 this can probably be attributed to a Spotlight, some retailers are scaling million. The largest of these was surge in good weather related sales, back openings in the hopes of a better DTZ Investors’ acquisition of Shop we may also be seeing the beginnings deal in the months to come, or in case Stop in Clapham from Delancey for of a recovery in consumer sentiment another retailer's failure makes a more £128 million, reflecting approximately as incomes continue to rise faster than desirable unit come available. 3.2% NIY, and comprising the only costs. As Graph 1 shows, while the shopping centre to have traded in overall consumer confidence measure 2018 with a value in excess of £100 GRAPH 1 million (there were five such deals Consumers are more positive about the outlook for in 2017 and seven in 2016). A rare their own finances than they were in 2017 exciting prospect this asset was keenly fought after but, much like Brixton 50 General economic situation over next 12 months Markets earlier this year, should not 30 Own financial Situation over next 12 months be considered reflective of the wider shopping centre market. Other notable 10 transactions in the quarter include Talisker Corporation’s purchase of -10 Wembley Central from St Modwen for £40 million (6.0% NIY) and NewRiver’s -30 acquisition of Grays Shopping Centre, Grays for £20.2 million, reflecting 8.2% -50 NIY (pricing includes a vacant office building with residential development -70 potential. Apportioned pricing on Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15 May 16 May 17 May 18 the core shopping centre income is understood to be in the region of 9.4% Source: GfK 02 Quarter 2 2018 NIY). process which sees shopping centre GRAPH 2 The lack of liquidity in the market has assets that are not fit for purpose Shopping centre investment been fuelled by a number of factors either downsized or redeveloped but unprecedented uncertainty in completely, reducing or reconfiguring 10,000 the occupational sphere, caused in the retail footprint, and bringing 9,000 part by a clutch of retailer CVAs and higher-value uses into centres, such 8,000 administrations in the early part of the as residential, hotel, student, office, year, has weighed heavily on investor or community uses. We have seen 7,000 confidence. Announcements of store examples of such assets trading this 6,000 Q4 closures for high street staples such quarter with Reef Estates securing 5,000 as Marks & Spencer and Carphone St George’s Shopping Centre in £m Q3 4,000 Warehouse have also hampered Gravesend as a keystone for a Q2 appetite for secondary shopping centre residential-led development, and 3,000 Q1 assets, especially those anchored by NewRiver’s aforementioned purchase 2,000 department stores or with significant of Grays Shopping Centre. Local 1,000 exposure to mid-market fashion authorities are also at the forefront of multiples. Aversion to these tenants this trend, acquiring shopping centres 0 has manifested in the fact that only two in their town or city centres as a department store-anchored schemes catalyst to drive regeneration where Source: Savills having traded so far this year, in both the private sector, for one reason or cases anchored by Fenwick, whilst another, has been unable to deliver; no investor has acquired in a scheme whilst also bolstering future revenue Across the sector, liquidity has also anchored by Debenhams, House of streams to protect council services. been held back by an arbitrage Fraser, or Marks & Spencer. During the last quarter, acquisitions of between vendor pricing expectations Crompton Place in Bolton by Bolton and their valuations, and sentiment-led Despite the statistics, certain silos of Council for £14.8 million (4.6% NIY) purchaser returns criteria. However, the market are proving more resilient. and of Liverpool Central for £13.25 as evidence starts to emerge and Demand for London and South million by Liverpool City Council have sentiment persists, we anticipate East assets remains strong as the exemplified this. this gulf to narrow as those investors retrenchment towards the perceived without the appetite (or ability) to security of these geographies Local authorities have therefore make the requisite capital expenditure continues. During 2017, London remained a key buyer group in 2018, to deliver business plans seek an and the South East accounted for directly acquiring seven of the twenty exit.