Cleo Folkes

You might be familiar with statistics, based on the lease events report by MSCI & BNP PRE, that roughly show that retail is a safer investment than offices and industrial based on the fact that retailers on average tend to sign longer leases than office or industrial/logistics, tend to ask for fewer break clauses within new leases, choose to activate a break less often and get shorter rent-free periods. Also, if a property falls vacant at the end of a lease it gets re-let relatively more quickly. So, does that show that retail is the best place to put your money?

Judging by the growth of money heading for logistics, the answer is probably no. So why?

Retail is suffering from very strong headwinds, and it is getting punched from many sides. Some retailers who are selling what is wanted and how it is wanted (and how quickly) are booming, but those that do not keep up are wilting. House of Fraser, Debenhams, Mothercare, Moss Bros, Claire’s Accessories and New Look represent just some of the struggling retailers whilst others already failed to make the summer of 2018, such as Toys R Us, Maplin, Prezzo and Carpetright. The chart above, based on data from the Local Data Company (LDC), shows net physical store closures accelerating.

What people want and how

Consumers are shopping less in-store and more and more on-line. A physical presence of a store is becoming less of a requirement and more of a burden to retailers. Retailers require fewer stores to ensure national coverage, and those close redundant stores. Those retailers that combine a ‘physical’ store presence with an on-line presence often retain their market share if done well. But remarkably many physical shop retailers are old-fashioned and do not have a (satisfactory) on-line presence. Some types of products are more susceptible than others to be replaced by on-line shopping. Counter-intuitively clothing is now 30% sold on-line.

In the UK on-line shopping in Q417 accounted for 18% of retail spend according to the ONS. Predictions are that on-line shopping will go up to 40% of retail spend, perhaps even around the 50% level. People want an experience when they go for a day out, or they want their parcel delivered to their door quickly. Which retailers can win this race to fulfil the customer’s wish and still make a profit? There lies the challenge.

The exodus from the city centres to the suburbs was reversed in many places (although this can be subject to change again). For now some suburban schemes are suffering from the renewed attention on the city centre, away from the suburbs.


Some retailers are heavily burdened by debt. Private Equity firms might take a firm private, load it up with debt in an effort to boost their returns, but in stead kill off the goose with the golden eggs.


Retailers are being pummelled from many sides. Punched on the nose by rising wages. Punched in the stomach by Brexit, causing input prices to rise. Kicked in the shin by low wage growth so consumers become more choosey with their disposable income (in part due to low consumer confidence), particularly hurting those with lowest incomes. A blow to the neck is the rise in business rates and rents. Distribution, fuel and advertising costs are just there to add some more punches to the temples and kidneys.

Demise of key retailers

When big retailers go under, others might suffer. If we are taking about a retail park, shopping centre or high street where a retailer was a draw. Footfall might decline to that destination, and other retailers might suffer as a consequence. An unpleasant side-effect. That is why in the US some shopping centres are at death’s door: retailers there often had clauses granting them a rent-reduction or get-out clause if a big anchor left or closed. In the US 30% of ‘malls’ (300 schemes) are at risk of closure! shares their stories with their readers.

Like the US, the UK has too much floorspace, and the weaker schemes, especially at the smaller end, are under threat. Shopping centres are increasingly being filled with leisure uses, co-working spaces, car or product showrooms, residential and F&B (Food & Beverage) – but is it still a shopping centre at the end? Pricing for prime centres (c.4.4%) and secondary centres (say 8.5%) show a huge gulf in the expectations for their futures and risk levels.

The higher yielding properties as well as the lower yielding properties increasingly demand active asset management. As across asset classes properties become more operational in nature. The property asset classes are converging in that sense. Landlords have to become more pro-active and provide more services and technology in buildings.

In conclusion

In conclusion we can say that the operating model of retailers is changing, willingly or not, with clear winners and losers. This (r)evolution is taking place due to structural changes such as changes in consumer preference, technology and a growth in operating costs coinciding with declining margins and often high debt-burdens.

Some retailers are coping with this change very well, and some retail landlords are on top of the changes, acting as leaders in their field. But it’s not a sector you can afford to be sleeping at the wheel, as we all know that can be deadly.

I have helped organise a seminar called ‘Technology: the make or break of retail?’ through SPR on 19th June, where we will look at how technology is a threat but also poses a great opportunity to retailers. Retail isn’t dead, it’s changing. For better, for worse, in sickness and in health.

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