There have been few structural shifts in the property sector as profound as the one currently taking place in retail. Consumer spending patterns have drastically changed over the past five years, with online sales now accounting for 19.7% of all retail spend in the UK (August 2019, source: ONS), compared to 11.5% in August 2014. When you look at fashion retailing specifically, online sales accounted for 26.8% of consumer spend on clothing in 2018 (source: Mintel).
It is little wonder, then, that ‘bricks-and-mortar’ retailers are suffering. Those that haven’t invested in a strong online service are being left behind. Retail empires, once kings of the high street, are crumbling – the latest two being the Arcadia Group and Debenhams.
A growing number of retailers, even those that are still profitable, have resorted to the use of the controversial company voluntary arrangements (CVAs) – a form of insolvency – to shut unwanted stores or slash rents across their estate. Retailers are increasingly exploiting the CVA to duck their financial commitments. Healthy retailers are now at a disadvantage and have started to push for rent cuts of their own to level the playing field. Until legislative change comes from central government, retailers will continue to exploit this loophole, at a significant cost to retail landlords.
The double whammy of an erosion of income and a drop-off in the value of retail assets have hit retail-focused property companies hard. They are all trading at significant discounts to net asset value (NAV), to such an extent that some have become takeover targets. Intu Properties, which has been the subject of two failed takeover attempts recently, is trading at around an 80% discount to NAV and is now reportedly the subject of a buyout led by Orion Capital Managers. Capital & Regional is in talks with South African REIT, Growthpoint, about the sale of a majority stake. However, other retail-focused property companies are actually performing well but have become victims of the negative sentiment around retail.
Amid all the doom and gloom, there are underlying trends emerging in the sector that suggest it could be due for an uplift in fortunes. Here we explore more…