Retail Assets to Become More Polarised In 2019 Says CBRE
- Retail sales volumes expected to show a modest increase in 2019
- More underperforming retail space to be redeveloped in 2019
A ‘perfect storm’ of Brexit, business rates, inflation, the growth of e-commerce, and employee cost pressures, will continue to weigh on the minds of UK retailers in the year ahead, according to CBRE UK’s 2019 Real Estate Market Outlook. The retail and hospitality landscape will polarise into ‘experience’ and ‘convenience’, with shopping centre owners likely to act to reposition their assets accordingly. Investment volumes will remain low, but pubs, leisure, and roadside retail will move increasingly into investors’ sights as these previously niche sectors become more investable.
According to the report, uncertainty surrounding Brexit is likely to dampen investor appetites through to Q2 2019. However, a rebounding of investment towards the end of the year is expected as uncertainty around Brexit reduces. Total returns to retail property will remain low, or slightly negative, until 2022 when returns are anticipated to bounce back to around 7%, and 9% in 2023.
2018 saw a sizeable number of retailer Company Voluntary Arrangements and insolvencies, reflecting the pressures felt from minimum wage increases and other labour costs, inflation, business rates and the growth of e-commerce. This is reflected in CBRE’s retail rental forecasts, which show a 1.9% fall in 2019, remaining negative until 2021 when growth will return with a 0.2% uplift.
Investment volumes will remain muted until well into 2019, not least because many of the underlying pressures facing retailers in 2018 are unlikely to abate any time soon. In-store retailing continues to come under pressure from online sales. The current 18% internet share of retail sales is expected to rise to around 20% in 2019, feeding the demand for logistics space, especially in urban ‘last-mile’ areas. Nonetheless, retail sales volumes are still expected to show a modest increase in 2019 even after allowing for the impact of e-commerce.
Within the shopping centre asset class, those in the most convenient locations (often below 7,000 sq. m), and those who create a destination appeal for consumers to have a ‘big day out’ (usually over 50,000 sq. m) will see the most significant returns in the year ahead, continuing the divergence in performance. The majority of the 1.28m sq. ft. or 119,000 sq. m of new shopping centre space planned to open in 2019 (including schemes under construction over 100,000 sq. ft. or 9,300 sq. m) will be through the expansion of existing assets. Destination centres will drive this expansion but such centres will increase the proportion of space dedicated to leisure and entertainment, rather than traditional shops.
In response to evolving consumer demand, CBRE expects that owners of mid-range shopping centres, as well as some small and large centres, will increasingly choose to redevelop underperforming retail space over the next year. Some landlords are set to enter the private rented sector market to create additional value from land around some of their assets. This will be supported by a relaxation of planning rules to allow shops to be converted into homes and offices.
While some pressures for retailers will start to fall away in 2019, others including the global economy running out of steam are likely to take their place. This will force retailers to focus even more on cost efficiency and innovation. Although the sector is witnessing significant disruption both from cyclical and economic factors, retailers who innovate quickly and invest in the consumer are likely to prove resilient.