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Retail property: time to check out?

Amid poor retail data, the rise and rise of internet shopping and recent high-profile retail failures, John Cartwright, CEO of the Association of Real Estate Funds (AREF) asked three prominent members of AREF to give their views on this troubled sector.

Justin Upton, fund manager, M&G Real Estate

Compared to retail, industrials have been the major beneficiary of technological change. In its simplest form, this is evident in the sector’s shift in yield as investor appetite for the sector has driven it below that of retail for the first time. E-commerce has been at the root of the ‘problem’ affecting the retail space that has experienced some ‘in-fighting’ of its own, with the high street on the ropes at the hands of the modernising retail parks - an integral physical presence to the omnichannel offering expected by consumers. 
Recent news of retailers going into administration has risen the spectre of a more challenging future ahead. However, it’s not as straightforward as new entrants and channels to the market taking market share. 
At times other factors can be at play such as a senior management team’s failure to evolve, arguably true of Toys ‘R Us where their outdated stores competed with the likes of Smiths Toys that present a more engaging shopping experience, akin to Hamleys on Regent Street, experiencing similar like-for-like toys sales growth as Amazon. In the case of Maplin, it was being undermined by its owners. Despite generating an operating profit before goodwill and amortisation of £2.4m in 2017, the 15% charged as a private equity business loan proved overly burdensome with an annual repayment of £13.7m. There is a growing question within the industry as to whether the venture capital business model adds value in the UK. The evidence most acutely shown via Company Voluntary Arrangements (CVAs) is it may not, because it places real businesses under too much financial stress to survive, let alone prosper.
Clearly the world has moved on and old school retailers need to be live to the changes in their market and critically evaluate the best course of action for their business. Pure play internet businesses are an exemplar here, already adjusting their business models by opening physical stores, reacting to their omnichannel consumer demands

Andrew Hook, fund manager and Jonathan Bayfield, senior analyst, Aviva Investors 

Shoppers’ expectations are being radically altered. This can present both challenges and risks for retailers and their landlords. The key for us as investors is to understand which assets and tenants are best placed to serve the changing desires and expectations of shoppers now and in the future.
Physical stores need to offer an experience that lives up to customer expectations and complements the expediency of e-commerce. Historically, cost, choice and convenience have been key to consumer gratification. Yet now there has been a shift towards vibrant environments and enjoyable, enriching experiences. 

Locations offering low-engagement products are likely to face the greatest challenges. These are routine purchases where speed, efficiency and price are key or where brand loyalty leads to like-for-like repeat purchases. Longer term, e-commerce will supersede stores as “auto-replenishment” becomes the norm. By contrast, locations offering an interactive, tactile and personalised customer experience involving high-engagement products may benefit. Stores can offer a touch point with customers, a distinctive experience versus e-commerce. They have the potential to be a crucial space for customer engagement and brand value. 

As a result, we expect store-based retail sales to decline significantly particularly for low-engagement products. As a result, fewer, smaller stores are likely to be needed.  The role of stores is also set to change significantly. Some high engagement stores will be larger, particularly flagship stores, and smaller stores will become platforms for discovery and interaction. They will form an increasingly valuable part of multi-channel retailing strategies as online and offline retail become more integrated.

David Wise, investment director, Kames Capital

Retail has been, and probably always will be, a dynamic industry that seems to be forever going through a process of creative destruction, with new businesses emerging and others fading and dying. It seems this evolutionary process is currently proceeding at a faster pace, with names like Woolworths and MFI belonging to the distant past.

On top of the issues the sector faces, there are businesses like New Look and others who, in some cases opportunistically, are going through a CVA process to force rent reductions from landlords/investors.

So how is this likely to affect property investors?

Firstly, it's important to realise that the change hasn't finished, as most online retailing isn’t profitable, as the cost of delivery and dealing with the huge volume of returns is a major problem for the sector. This is likely to drive further change as the likes of Amazon and other previously online only retailers look to open physical stores and move in the direction of a more profitable click and collect model, which may do away with some of the army of delivery vans that currently clog our urban environment.

The changes that property investors have to consider will affect not just traditional high street retail but also industrial/logistics and out-of-town/edge-of-town retail boxes.

As a veteran investor, I would suggest that traditional retail isn’t dying but along with the other sectors mentioned, going through a period of very rapid evolution, creating considerable uncertainty. In poorer secondary or tertiary locations of poorer towns, retail probably is dead in its current form. However, for good quality towns, in relatively affluent locations, offering either convenience or an attractive experience, I expect it still has a good future.

Investment and leasing markets are still grappling with pricing this change. For experienced investors, who need to be very selective, there are opportunities. But traditional retail is clearly not a sector without risk!

AREF brings the industry together to discuss key issues they all face. “Like our members, AREF itself has the end investors’ best interests at heart. We want to engage with investors, to listen to them and to share insights from the leading figures of the real estate funds industry,” says John Cartwright. The association has a page dedicated to investors on its website and investors can follow AREF on Twitter and LinkedIn.



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