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July 27, 2016

When the effects of the Global Financial Crisis (GFC) began to manifest in malls, high streets and in retail investors’ strategies in 2008, it was a very different market to the one we see today.

To an extent, the GFC and broader structural challenges have helped shape the industry as we recognise it in 2016. The phenomenal rise of ecommerce, propelled by technology, has changed the role of retail real estate and has increasingly placed emphasis on a smaller pool of successful markets and assets. Whilst there is still some way to go, some of this structural change has been absorbed by the retail market and the sector is, arguably, better positioned to deal with uncertainty than in 2007.

Brexit will undoubtedly hit consumer confidence in the short term, and the gap between yields and values on prime and secondary assets may widen. But there is still significant value in relevant retail property located in the right locations.

Resilience will prevail
If the last eight years have shown us anything, it’s that relevant retail is resilient and this prevails throughout the UK, with strong retail and retail real estate continuing to compete for consumers’ time and money.

Patchy demand and rental declines in weaker locations were evident even before the EU referendum and Brexit will not necessarily be responsible for the re-pricing of some secondary assets. Whether or not we see a post-vote rebound in relation to Brexit will rely on stripping out other factors that impact retail, from extreme weather to sporting successes or failures over the recent and coming months.

While we could see investors sit on income streams, unless they’re forced to sell, prime yields should remain fairly resilient. Furthermore, assuming that occupational demand remains more robust than in previous downturns, for the right properties, and favourable currency movements and capital flow support overseas investor demand, there should be a limited impact on values for strong retail assets.

Austerity the new normal
Among consumers, retail represents an increasingly smaller proportion of discretionary spending and retail sales have become more resilient to economic shock; this was demonstrated during the GFC, when retail performed better than other sectors competing for consumers’ money.

Big ticket items remain most susceptible to a slowdown in consumer spending but we expect leisure, including F&B, to remain more resilient. With austerity a familiar feature in post financial crisis UK, consumer behaviour, whilst volatile in the short term post vote, won’t change significantly.

As with other areas of the market, uncertainty will linger until the next steps for initiating Brexit are clarified and political parties recover from recent fallout – for the Conservatives this appears to be happening sooner than expected. Although job certainty and rising inflation could affect retail in the long term, any near term interest rate reduction will result in falling mortgage costs and cheaper credit, which would offer some UK shoppers some respite.

Opportunities for retailers
For now, the currency movement makes UK retail more affordable; for some retailers this is a good investment opportunity to secure space on attractive terms. Meanwhile, domestic retailers, start-ups and online operators, will benefit from reduced export costs.

Longer term, if the pound remains weak, it will get more expensive for retailers who buy a significant amount of their merchandise in U.S. dollars, putting margins under pressure. However, in the short term, most retailers are well-hedged against a fall in the value of sterling, and will be able to maintain current sourcing costs and pricing strategies.

It’s important to remember that a healthy tourism industry underpins much of the UK’s, especially London’s, retail success. The weak pound could boost tourism in the short to medium term, from the U.S., European and Asian markets, bringing clear benefits.
Change leads to uncertainty; it also leads to opportunity here and elsewhere in the EU. Winners and losers existed in retail before the EU Referendum – in that respect nothing has changed.

Click here for more JLL analysis on Brexit

James Brown, Head of EMEA Retail Research, JLL
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