New research from global real estate advisor CBRE shows that a combination of structural changes, cyclical economic influences and one-off temporary factors have been behind the failure of a series of UK retailers this year – not just the inexorable rise of ecommerce. The findings are revealed in its latest report: Weathering the perfect storm in UK retail real estate.
The report finds that whilst the growth of ecommerce is often cited as a key factor in the demise of retail, it cannot be considered as the sole or even the major cause of store closures. It argues that UK retailers and their landlords are experiencing a ‘perfect storm’ in which an unusual combination of adverse circumstances has led to a notable range of retailer failures or restructuring.
Structural changes in the form of consumers’ spending preferences and the growth of ecommerce have in part contributed to retailers’ performance.
However, economic factors have also challenged retailers. Increased wages due to a decrease in unemployment and wage growth above inflation, combined with EU workforce shortages have had wide implications for the retail sector, especially those with a high concentration of stores in London and the South East. Real disposable income growth has been extremely weak over the last decade, and Brexit-related uncertainty, while temporary, has also added extra pressure on consumer prices through imported inflation.
One-off public policy changes have also served to add substantial cost pressure on retailers. The 2017 Business Rates revaluation (the first for seven years) has added to the burden, especially in London, with retailers experiencing an average increase in their bills of 14% compared with the average decrease of 5%. This has added an increased cost pressure on retailers with a significant proportion of stores in London but some relief for retailers focused elsewhere, especially retailers mainly operating in the North of England. However, as revaluations move to a three-yearly cycle from 2021, this effect is unlikely to be as pronounced in future as it has been recently.
Government policies aimed at raising wages for low-paid workers have also had a disproportionate effect on the retail sector. At a time when profits, even for successful retailers, are severely squeezed, the increase of the National Living Wage and additional cost implications of the Apprentice Levy add to the strain, forcing retailers to make tough decisions to manage the increased costs.
Despite this difficult backdrop, analysis from the report reveals that 2018 has so far seen 30 retailer failures, which is well below the 10-year average of 38. This figure is also significantly lower than the 58 collapses seen in 2008, during the height of the global financial crisis – demonstrating that a turn in the economic cycle can have a much more prominent effect on retailers than long term structural change.
A popular mechanism for weathering the storm in 2018 has been the use of Company Voluntary Arrangements (CVAs) process to try and restructure their business, including rent reductions and store closures. While the process can help retailers, it does not provide a guarantee of recovery.
Rhodri Davies, Head of CBRE UK retail commented: “Landlords and investors might resent CVAs as an ‘easy’ way to reduce rents for retailers. However often CVAs provide a better alternative to retailers entering into liquidation or administration, which should ideally be avoided if the retailer is trading well.”
CBRE examined a sample of 1,419 stores within recent retailer restructurings, and found distinct regional patterns to store portfolio change, with stores in London and the South East typically performing better, despite higher business rates and wage bills on average. At the town level, stores in bigger cities are also more likely to be retained than closed, supporting the argument that prime city centre ‘experiential’ retail is preferred by customers.
Tasos Vezyridis, Senior Director, UK Retail & Logistics Research commented: “Our analysis challenges the usual excuse that the slow and steady rise of ecommerce has been the prime or only cause of retailer failure. While ecommerce is an important influence, its strong growth can only have come as a surprise to the sleepiest retailers in 2017 and 2018. A potent mix of other structural, cyclical and temporary factors have been involved in retail failures – not least Brexit. In many cases, retailers seem simply to have taken their eye off their customer. The evidence is clear that retailers with a good business model, who proactively close and open stores to follow consumer trends, have survived this ‘perfect storm’.”
The report finds that landlords and retailers will need to work more closely together to gain a better understanding of customers and agree lease terms that are more flexible and suitable for the current market conditions, but more importantly are agreeable for both landlords and retailers. Retail is increasingly becoming a ‘hands on’ operational real estate asset class, and the traditional case made for long leases might actually be a disadvantage if it prevents a landlord from maintaining an attractive mix of vibrant, popular tenants.
Rhodri Davies, Head of CBRE UK retail concludes: “To survive in this new environment, retailers need to continuously review their understanding of the modern consumer as well as their respective property portfolios, especially through the use of data insight, to adjust constantly and evolve their proposition and locations. Losing sight of the customer and their property holdings might not matter when the economy is doing well, but the evidence is that doing so in a downturn can be fatal, especially when retailers are slow to adapt to structural change.”
Retail woes bring UK commercial property values down -0.4% in November
At the All Property level, UK commercial property capital values decreased -0.4% in November while rental values fell -0.2%. This is the first-time capital and rental values have both fallen in the same month since October 2012. All UK Property total returns remained positive, pushing year to date total returns to 6.4%.
Retail sector capital values fell -1.9% in November. Retail capital values have fallen -5.3% in 2018 so far. Excluding the period immediately after the EU referendum, November’s results were the biggest decrease in sector capital values since May 2009. Capital values in Rest of UK High Street Shops fell -1.6% over the month while values in the South East were flat. Although Shopping Centre capital values decreased -1.5%, the sector average was pulled down by a -3.0% fall in Retail Warehouse values. Rental values in the Retail sector decreased -0.9% in November, with Retail Warehouses recording a fall of -1.2%.
Capital values in the Office sector increased 0.2% over November, with Central London and Rest of UK Offices performing in line with the sector average. Outer London/M25 Offices recorded capital value growth of 0.3% over the month. Rental value growth for the sector was 0.1% in November. Overall, Central London Office rental values were flat over the month although West End & Midtown values decreased -0.1%. Rental values in the Outer London/M25 and Rest of UK submarkets increased 0.3% and 0.2% respectively.
The Industrial sector reported capital value growth of 1.0% in November, bringing year to date capital growth to 11.3%. Rental values for the sector increased 0.6% over the month, with growth in the South East (0.4%) being outpaced by Industrials in the Rest of UK (0.8%).
Robin Honeyman, Senior Research Analyst at CBRE UK, said: “Sharp falls for Retail Warehouses this month resulted in the first negative capital value growth at the All Property level since the EU referendum. The -3.0% decline in capital values over the last month brings the year to date fall for Retail Warehouses to ‑5.7%, still some distance behind Shopping Centres where values have fallen -8.2% in 2018 so far.”