The United Kingdom’s retail sector is showing signs of a pricing and rental correction, according to UBS Asset Management – Real Estate & Private Markets (UBS REPM).
In its latest U.K. Real Estate Outlook paper, the manager has downgraded its full-year total return expectations for the retail market from 6.5 percent to 6.1 percent after warning that “storm clouds” are gathering over the troubled sector.
Although retail sales rose by 2.1 percent in the second quarter of 2018 — the sector’s strongest performance since Q1 2004 — and inflation is set to reduce to 1.8 percent next year, consumer spending is forecast to slow from 1.1 percent in 2018 to 0.9 percent in 2019. UBS REPM explains that household budgets will be affected by ongoing welfare reforms, higher interest rates and softer employment growth. The U.K.’s GfK consumer confidence index also recorded a further decline in July to –10, despite several “feel good” events in the second quarter including the World Cup, Wimbledon and prolonged warm weather. The overall index score has been at zero or negative since February 2016.
On top of the ongoing fight with e-commerce outlets, UBS REPM has identified three main market events — business rates revaluation in 2017, increases in the U.K. minimum wage and Brexit-related factors — that have exacerbated the problems with consumer demand.
“These factors have translated into a higher cost base for physical store retailing, while retailers were already grappling with the challenges of delivering seamless and profitable online retail experience,” says the report. It adds that many domestic U.K. retailers have also struggled with significant legacy store portfolios. In general, U.K. retail leases have been long at 10 years or more, meaning that companies have struggled to adapt to changing market conditions by altering their store portfolios.
“Unfortunately, the hangover of historic leases has been partly responsible for the distress,” continues the report.
“In recent months there has been a spike in retail administrations and CVA activity [a method of avoiding liquidation in the U.K.]. Affected retailers come from a broad range of sectors including fashion, toys, department stores, household goods, and food and beverage.”
