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Property special: Estates of uncertainty

The property market was hit hard during the last recession as many retailers put the brakes on expansion. However, experts say it will be business as usual during Brexit and beyond. 

“When I heard the outcome of the vote, I thought it was going to be Armageddon,” says Tony Devlin, head of UK retail agency at property agency CBRE.

Devlin was one of many who worried that the vote to leave the EU would bring about a property crash, and his fears seemed justified as investors exited retail property funds in the weeks following the result. However, two months on and Devlin says his fears are assuaged and that retailers have taken a “business as usual” approach to property deals.

“Our retailer clients are still thinking about expansion. They have plans and budgets in place and they’re sticking to them,” says Devlin.

James Ryman, executive director at Capital & Regional, agrees: “Retailers are continuing with store acquisition and refurbishment plans and there is certainly no discernible change in their outlook.”

Ryman says the developer has completed a range of lettings and renewals that were agreed before the referendum vote on the same terms and reports “strong demand” for space since the vote.

In fact, Mark Phillipson, head of retail at property agency Colliers, says deals have stepped up since the Brexit vote as there had been a “pause” in action in the run-up. The Local Data Company found that retail and leisure property moves dropped 46% year on year in July as stakeholders delayed decisions to open stores, developments or conversions in the lead up to the referendum.

The commercial property market is more healthy than it was two to three years ago.

Phil Whittle, head of store operations, Schuh

Phil Whittle, head of store operations for 120-store footwear retailer Schuh says Brexit is not stopping it negotiating on property deals: “There’s no real change in the mood of landlords. The commercial property market is more healthy than it was two to three years ago. I don’t think we’ll be going back to the days of cheap deals.”

Schuh

Schuh

Schuh is still negotiating property deals

This might come to the disappointment of retailers. During the recession, retailers expanding their portfolio were able to secure cut-price property deals in a weak market.

However, the retail property market was in good shape when the Brexit storm hit. Colliers monitors 421 retail locations and found rents had either stabilised or grown in 95% of them. Phillipson says: “I don’t think we’ll see the bargains we did in 2008. It’s a different market now and there is very little vacant space.”

The speedy appointment of a new prime minister has helped calm the storm, says Phillipson. “It’s good news that Theresa May was appointed quickly. It’s settled people down. She was seen as a no-nonsense candidate and most people think that type of person overseeing this situation will be a good thing,” he says.

Uncertain times

However, an air of uncertainty still hangs over the UK, and that could spell trouble ahead. “Uncertainty causes stagnation, which is bad for business,” says Phillipson. “I suspect we’re not going to get a swift resolution to Brexit. It’s untested ground and will be very complicated.”

The major concern for retailers right now is consumer confidence and what impact that will have on spending. The GfK Consumer Confidence Index showed that confidence plummeted in July in the wake of the Brexit vote – its sharpest month-on-month decline in 26 years in July. However, it rebounded slightly in August and retail sales stayed strong. The BRC-KPMG Retail Sales Monitor reported that like-for-likes were up 1.1%.

Ryman says footfall has grown strongly across Capital and Regional’s portfolio since the Brexit vote and trade is up. “Shoppers seem more concerned with expanding their autumn wardrobe than when and how the UK will exit from Europe,” he says.

Devlin believes foreign visitors have boosted sales: “London is seeing lots of tourists taking advantage of the weak pound. On the flipside, across the UK people are deciding their European holiday is too expensive and are staying home,” he says.

Almost immediately after the Brexit vote we saw a drop off in our stores

High street retailer

However, one retailer told Drapers it was witnessing a “softening of demand”.  A source, who wished to remain anonymous, said:. “Almost immediately after the Brexit vote we saw a drop off in our stores. Consumers are unsettled. Two years [to wait before Brexit happens] is a long time. Our biggest concern is how long it’s going to take until things get back to normal.”

Retailers do appear more cautious on expanding into Europe. With the terms of the UK’s EU exit and prospective trade deals a long way off, some retailers are adopting a wait-and-see approach before making major investments in Europe.

Schuh has fledgling operations in Ireland and Germany, where it has 10 and three stores respectively. Whittle says: “We’re still totally committed to the countries we trade in, but we’re taking our time and seeing what the landscape looks like before we invest in more stores.”

Piling on the pressure

One certainty following the Brexit vote is that sterling has been weakened. Anthony Thompson, chief executive of lifestyle retailer Fat Face, which has 207 stores – including seven in Ireland – believes the currency deflation could lead retailers to rethink their property plan.

Sterling is down just over 13% since the EU vote and, as most retailers buy in dollars, it means costs have increased.

“Most business models are predicated on margin and are underpinned on reasonable currency exchange and no inflation. If currency decreases 15%, then your margin is wiped out,” says Thompson.

This comes at a time when retailers are already facing rising costs. The national living wage came into force in April this year, giving more than 300,000 retail workers a pay rise. Next year’s business rates revaluation will also hit retailers that have large portfolios in London and the south-east. When extra costs are taken into account, the profitability of certain shops could be destroyed.

Thompson believes retailers will have to alter their business model to weather this perfect storm: “Unless rental terms diminish dramatically or we pass on that on to the consumer, we’re going to have to exercise a greater control on what we buy and how we sell it,” he says.

“We can’t control currency, the government or the weather, but we can control our inventory levels and whether or not we discount.”

Devlin says there is little landlords can do to lower existing rents and agrees there will need to be a greater focus on full price sell-through to recover lost margin.

However, property experts say the government could act to protect retailers and the property market by re-evaluating business rates. “There are too many instances where commercial rates are out of sync with the rental value of a property, and in some cases is more than rents. It’s punitive to some retailers,” says Phillipson.

Still attractive

Despite the pressure on the retail sector, Ryman is confident that the UK is an attractive market for fashion retailers. He says that location and quality of retail environment will be key, as always: “Stores in high-footfall areas, in centres that are dominant in their catchment will continue to be most resilient,” he says.

Phillipson believes London, in particular, will continue to thrive: “It’s becoming a more and more dynamic place to be. Crossrail is helping more people move around and there’s lots of proposed developments that will be great additions to the capital.”

However, he says it will be a different story elsewhere: “We don’t see the scale and depth of financial strength outside of London,” he says.

For the time being, it is business as usual for retailers looking to expand or improve their property portfolio. If this resolute approach continues, fears of a Brexit storm may turn out to be hot air.

 

Has the Brexit vote really had an impact? The state of the market in numbers:

  • Retail property moves fell 46% in July, because of pre-Brexit vote uncertainty in June.
  • The value of sterling dropped 13% following the leave vote
  • London prime rents rose 7.8% in the year to the end of April 2016, reports property agency Colliers. 
  • Rents had either stabilised or grown in 95% of retail locations in the year to the end of April 2016, Colliers found. 
  • Retail like-for-likes grew 1.1% in August, according to the BRC-KPMG Retail Sales Monitor

 

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