The year 2020 was a brutal year for the retail property market with coronavirus woes compounding an industry already beset with structural difficulties.
Valuations across the sector were down an average 19 per cent for the year, although it was a mixed bag as retail parks fell “just” 7 per cent while prime high streets took the hardest hit with values on Grafton Street and Henry Street down 26 per cent and 31 per cent respectively. So with valuations marked down and double-digit rent declines it’s worth asking if now is the time to invest or sign a new lease?
The pandemic has accelerated the role of online retail and made it very clear that a reliance on bricks-and-mortar alone is unlikely to succeed. Fashion retailers who were already struggling have been sunk by the lockdown restrictions, with Laura Ashley, Debenhams and Monsoon among the high-street causalities of 2020. While these names will continue in some form, it will likely be with a vastly-slimmed down physical presence.
Faring better have been the big retail parks where space has made it easier to maintain social distancing and the right store mix has helped attract business. Big box home improvement and DIY retailers have all been doing well when allowed to trade.
Expansion mode
We have also found that all of the suburban and the smaller neighbourhood shopping centres that we are involved in, which are generally grocery-anchored and convenience-led, continue to trade well, with low levels of vacancy.
It may also come as a surprise that there are some retailers still in expansion mode. In the grocery and convenience sector, we’re aware of Lidl, Aldi, Tesco and Dealz all looking for new sites. We’re also seeing interest from Boots and Chemist Warehouse in the pharmacy sector; JYSK, The Range, Flying Tiger in the furniture and household sector; and Insomnia and The Natural Bakery in food and beverage.
Unfortunately, that positive momentum doesn’t mean that the pain experienced in 2020 won’t continue into 2021, particularly with lockdown extending for several months yet. We expect to see more examinerships this year and further situations where debt providers to a highly-leveraged asset step in, as we saw with Goldman Sachs and Blanchardstown Shopping Centre.
The private equity buyers who were substantial investors in loan portfolios backed by retail assets at the bottom of the last cycle are less likely to double down given the challenges faced in exiting existing assets. If a retail-focused non-performing loan portfolio does come to market it will have to be at a deep discount to the original face value if it is to galvanise buyer interest.
Vision
An area of buyer opportunity will be where an asset has strong alternative use value for conversion into residential, office or logistics purposes. We’ve already seen that with the sale of the St Stephen’s Green Shopping Centre, which has potential to introduce office or residential uses to the site to compliment the retail.
It’s always darkest before the dawn, as the saying goes, and in any market going through major change it will be the investors and landlords with vision who will be best positioned to succeed.
For investors able to anticipate future trends, valuations in specific assets should be starting to look attractive. And prospective tenants weighing up signing a lease will find landlords more flexible and open to new concepts as the dominance of the UK fashion multiples is rolled back. We already knew that the retail experience had to be about offering shopper a level of experience and entertainment that can never be replicated online. Given these factors, we remain confident that there will always be a role for physical retail stores.
