Retail property: 2017 revaluation may offer hope
16 February 2017
Online retail may have changed high streets forever, but the 2017 revaluation can offer hope to secondary locations. John Menzies reports on the state of UK retail property
Hardly a week passes without a major story about retail in the news. Whether it be the demise of BHS, fluctuating sales or the consequences of Brexit, the headlines about how we shop never seem far away. And no wonder – retail accounts for 6% of UK GDP and employs 4.4m people, and we have the second highest retail spend per person of any country in Europe.
So what are the emerging trends in the sector? And what can our under-pressure high streets do if they are to reinvent themselves in a trading landscape that is changing rapidly?
Fashion remains an extremely competitive sector in the UK and retailers that are fast, brave and relevant – such as H&M, Zara and Primark – have thrived in recent years. Zara, for example, can get a product from the design board to the store within 3 weeks, offering the consumer catwalk trends at an affordable price almost immediately. “Fast fashion” is what the consumer wants, and the retailers who provide this ensure their profitability.
Some 14% of total retail sales are now made online, but for many retailers that have embraced digital shopping the figures are substantially more. John Lewis, for example, reported that for Christmas 2015, 40% of its total sales were made online, which is further evidence of the seismic shift across the sector.
Peaks and portfolios
It is not just how we spend but when we spend that is changing. The amount of time for which retailers are trading at full price is contracting, and this is redefining the economics of the sector. The consumer is very willing to wait for the next sale, which is now rarely far away.
Retailers have become even more reliant on the “3 peaks” – Black Friday in November, the now familiar December sale and the traditional January sale. The days of turnover consistency are gone, and this is the principal reason for the move towards monthly rent payments, which are replacing the quarterly payments that are traditionally enjoyed by retail landlords.
Over the last 5 years, major retailers have been actively sizing their property portfolios to react to a very different trading climate. Your typical major national multiple retailer, which may once have had 300 UK stores, is now quite happy to operate 100 stores plus a website.
Electing not to renew leases at their expiry, exercising break options and undertaking a “pre-pack administration” – that is, arranging the sale of a failing business before it enters insolvency proceedings – have become familiar tactics as retailers strive to create more efficient store portfolios.
Playing to your strengths
Delve a little deeper into the influence of online shopping and some surprising trends are beginning to emerge. Retailers are constantly rethinking their online strategy, realising that physical shops are again one of their biggest assets.
What were once “pure play” – that is, online only – e-commerce retailers are now opening bricks-and-mortar stores, understanding that their business model works best with a multi-channel approach. For example, Amazon has opened 5 stores in the USA, Google has set up its 1st in London, and Made.com, which was originally launched as an online-only furniture retailer, has also opened its 1st physical store in the UK capital.
For major retailers with strategic growth ambitions, the challenge is to offer more than a space in which you just buy a product. Creating a shopping experience that cannot be offered online is the raison d’être, whether it be through the built environment or blending it with interactive, immersive technologies. This type of environment does not come cheap, and it is no surprise that the best-in-class stores have tended to appear in the strongest retailing locations rather than your local high street.
The challenge is to offer more than a space in which you just buy a product
The principal property market trend remains the “flight to quality”, with retailers gravitating towards the strongest and most dominant retail centres, where they have retained or opened new stores, while at the same time closing stores in smaller towns, particularly those that sit in the catchment of a major city.
It is no surprise that some of the most successful fashion retailers in recent years have been the most active in terms of new store openings, with H&M, Zara, TopShop and River Island continuing their push for larger outlets in key markets. H&M, for example, opened its largest UK store at 65,000 sq. ft this winter in Glasgow. Tenant demand remains robust for prime, well-configured retail space offering in excess of 20,000 sq. ft of accommodation.
Stopping for a bite
The growth of the food and beverage market continues to shape the tenant mix and style of our towns and cities. The most active operators opening new restaurants in 2016 included Byron, Miller & Carter, Bill’s, Five Guys, Prezzo, Smashburger, Tortilla, Barburrito and Wahaca.
The shift in consumer spending away from clothing towards other priorities such as recreation, culture and restaurants is pronounced, and the eating-out market in the UK is expected to have exceeded £53.3bn in 2016 – a growth of more than 40% since 2010.
The “social retail” scene is here to stay, but it is also an evolving market. The days of restaurants clustering, sometimes in locations remote from the retail offer in a town or city, are on the way out – operators want to be situated in shopping areas to drive turnover from the breakfast, lunch and dinner market, offering shoppers a convenient place to socialise and eat.
In some cities, though, planning policy has not yet moved with the times and still restricts restaurant uses in retailing areas. This increasingly feels like a policy out of sync with changing consumer habits, and one that surely has to change.
The local picture
While city centres and major destination malls are experiencing the highest levels of retailer and restaurant demand, the position in smaller, secondary retail areas is much more challenging. Vacancy rates are higher here and the level of tenant demand lower, especially from the fashion sector.
Rental values in many smaller towns have halved over the last 8 years as the supply of available property has outstripped demand. Notwithstanding this, there are still major retailers opening stores in smaller towns, including the likes of JD Sports, the Works, Peacocks, Bonmarché, Warren James, the Entertainer, Yours and Costa Coffee.
One of the biggest deterrents to the recovery of many small and medium-sized towns – particularly those in poorer areas – has been the level of business rates. The UK retail sector has one of the highest local property tax regimes in Europe, which has contributed to the number of retailer receiverships and deterred new and expansion-minded operators from opening stores. For many landlords, it has been a case of leasing with the handbrake on.
The last rating revaluation was in 2010, which was based on the value of the property as at April 2008. But the timing of the property crash saw rental values in many towns nosedive from late 2008 onwards, so in many harder-hit towns rental values are now less than half of what they were in early 2008; yet our property tax regime continues to levy charges based on pre-recession rents that bear no resemblance to the current market.
There is considerable optimism, therefore, about the 2017 rating revaluation, which will assess the value of property as at April 2015. This will see a reduction in rateable values in many of these smaller towns, which should see a marked reduction in property costs for retailers. The extent of the benefit to retailers will depend on the Uniform Business Rate and the detail of any transitional relief arrangements.
In England, the government issued a consultation paper setting out different options for proposed transitional relief. In contrast, there are to be no transitional arrangements in Wales, while the Scottish government has still to decide whether or not to introduce any. It therefore seems that the benefit of a reduction in rates payable could in the short term vary across the UK, and for the hardest-hit towns, transitional relief would be an unwelcome addition for both landlords and retailers.
Taking a medium-term view, the expected reduction in rates payable will encourage retailers to open new stores in towns that were previously unviable for investment. While business rates alone will not solve the regeneration problem, it is certainly the catalyst that many towns need to help kick-start a recovery. So although there are clearly challenges, it is an exciting time for the UK retail property market, and far from bereft of opportunity for both landlords and occupiers.
John Menzies is Partner, Retail Services, Cushman & Wakefield