The influence of digital technology continues to impact the UK’s commercial property market; particularly the retail and industrial sectors.
Morrisons recently announced that it intends to shut 23 of its M convenience stores and halt new openings as the expansion of supermarkets convenience store operations comes to an end. In January Tesco announced the closure of 43 stores including 30 Metro and Express stores. After writing down the value of its stores by £3.8 billion in its latest report and accounts, analysts are calling for the closure of another 200 under-performing stores.
Tesco has, however, opened six “dark stores” around London, just to handle home-delivery orders. While Waitrose continues to grow its Little Waitrose format it has also opened a second e-commerce grocery fulfilment depot at Coulsdon, in March to support its expanding online offer.
With the exception of Central London shops, the retail sector remains commercial property’s poor relation. In the year to March 2015 the rental values for Shopping Centres and Rest of UK shops declined by 1% while Retail Warehouse rental values stood still. After nine consecutive quarters of economic growth rental value growth has now spread to every other non-retail segment of the UK market.
South East industrial values increased by 4% in the year to March 2015 and Rest of UK industrial rental values by 3%. UK shop rents remain 14% below their peak and Shopping Centres are 19% lower. Industrial rents are just 5% below their peak.
A survey by PwC and the Local Data Company indicates that a buoyant economy is not sufficient to make up for the long term structural problems afflicting the High Street. The asymmetric nature of the economic recovery means that although the economy has grown by 10% since the trough, real average weekly earnings are at levels last seen in 2000/01 (see chart). This is compounded by the continuing encroachment of digital technology. Internet sales now account for 4% of food sales and 12% of Clothing and Footwear. As the UK entered the Great Recession in March 2008, internet sales were just 4.5% of all retail sales.
The PwC Local Data Company study of 500 UK town centres showed that the number of retail premises left empty last year almost tripled; 5,839 shops were closed and 4,852 were opened. Net closures increased to 987 in 2014, up from 371 in 2013.
The biggest casualties were mobile phone retailers, which lost a net 419 stores, or 18% of their total number of shops. Most of those losses were caused by the failure of Phones 4U in September.
Tougher rules for short-term lenders and the collapse in the gold price forced the closure of 233 cheque cashing and pawnbroking shops. Britain’s biggest payday lender, Wonga, recently reported losses of £37 million after the Financial Conduct Authority forced it to write off £220 million of loans to customers who should never have been given loans and the Church of England branded the company as morally wrong.
The impact of the internet is, of course, global. In the USA e-commerce accounts for 6.2% of all sales; and since 2012 the amount of industrial space in use has grown at an annual rate of 14.5 m square metres—double the pace in 2008. E-commerce accounts for a large proportion of this growth. At Prologis, the world’s biggest industrial-property owner, 30% of projects built for specific tenants are tied to online sales.
Industrial rents in the USA rose by 3.4% last year, bringing them within 6% of their 2008 level. Meanwhile US retail rents are still 12% off their peak.
In the UK, the growth of internet shopping and a strong rise in the demand for warehouses is reflected in the 7% growth in the Transport and Storage sector of the economy in 2014; and the demand for industrial investments. In 2014 institutional investment turnover in UK industrial property was second only to offices.
New investors have been attracted by the prospects offered by the industrial sector. In 2012 Blackstone, a New York-based private-equity fund, set up a firm called Logicor to buy industrial assets in Europe. Logicor now owns 67 million sqm throughout Europe of which 1.35 million sqm are located in the UK.
SEGRO, a UK Reit, has a portfolio of £4.7 billion of assets located in the UK and across Europe. In 2014 as investment demand for logistics remained strong the Reit reported a 17.1% increase in the value of its UK portfolio, located in London, the South East and the Midlands’ logistics ‘golden triangle’.
In 2015 Sego expects to experience a healthy demand for newly developed buildings, and further rental growth in London and South East England. Investment markets are also expected to remain strong supported by relatively high yields, the on-going low interest rate environment, and rental growth in UK industrial markets.
As online sales continue to grow, the UK’s most successful brands have generally developed a multichannel offer. As well as a profitable location in its own right, the store can also function as a showroom for the product or a distribution location for their online sales. More and more, retailers note that online customers are opting to click and collect, allowing the retailer to minimise their distribution costs and enhance sales through further purchases once in store. Retailers need fewer stores to cover the UK population than 20 years ago but increasingly need to focus on prime destinations.
Shoppers are buying more goods over the internet or at shopping centres and mid-market retailers such as the lingerie chain La Senza, which collapsed in July, are increasingly losing out to upmarket brands and low-cost operators such as Primark.
Reflecting the shifting balance between retail and industrial property, UK institutional industrial development expenditure in 2014 was the highest since 2007 and since 2010 has outpaced development expenditure on shopping centres. New shopping centre development levels fell to an all-time low in 2014 and even by 2019 the supply is only expected to have reached around 3 million sq. ft. In 2008, a record year, over 8 million sq. ft. of new shopping centre space was built in the UK.