Investment Trusts

Retail – Not all doom and gloom

Richard Kirby discusses the challenges and opportunities facing the retail sector.
March 2020

Richard Kirby

Director, Property Funds

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Risk Disclaimer

Past performance should not be seen as an indication of future performance.

The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

The value of directly-held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.

Opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The UK property market posted substantially lower returns in 2019 than it did in the previous year (as measured by the MSCI UK Quarterly Property Index), recording just a small positive total return. Factors that held market performance at muted levels included continued Brexit uncertainty, concerns regarding the outcome of the general election, a sluggish economy, and structural problems in the retail sector.

This last factor, the distress in the retail sector, dominated the UK market, as cyclical factors combined with structural changes took their toll. As a consequence, the retail market continued to drag down performance at the all-property level. Shopping centres and department stores were particularly weak, but as the Company Voluntary Arrangements (‘CVAs’), administrations and store rationalisation programmes continued, stronger performing retailers demanded rent cuts, flexibility in the form of turnover rents and shorter leases.

Prime retail property, both in and out of town and including Central London, has not been immune to the challenges in the sector. The key driver challenging physical retail has been the growth of online retailing, which continues to advance, but retail sales are still dominated by physical stores whilst the sector is going through a process of finding a new equilibrium between both routes to market.

Business rates remain largely unreformed and this occupier cost burden restricts the ability of landlords to increase or maintain rental income. As a result, rental growth has been negative while concerns about the prospects for the sector have hit investment activity, especially in the shopping centre sector. Transaction activity has fallen away in both the occupational and investment markets, and capital values have registered double-digit falls.

However, it is not all doom and gloom for retail. With in-depth research into regional locations and effectively-executed asset management programmes, there is still value and income to be found.

In October last year, The BMO Commercial Property Trust (BCPT), which is managed by BMO Real Estate Partners (BMO REP), completed three lettings comprising 33,500 square foot (sq ft) to Lidl, Hobbycraft and footwear retailer Deichmann at Newbury Retail Park in Berkshire. Lidl took up the letting on a 25-year lease, with the other two retailers both signing 10-year leases.

More recently, in February this year, BCPT completed an unconditional letting agreement with Marks & Spencer at Sears Retail Park in Solihull, significantly expanding the retailer’s existing presence at the park.

The letting agreement is for a redeveloped 35,000 sq ft retail unit, which was formerly occupied by Homebase, on a 20-year lease at an uplift on the previous passing rent. All the necessary planning consents have been obtained and demolition works are underway at the site.  

As part of the redevelopment, the new retail unit will be combined with M&S’s adjacent 12,000 sq ft food hall, where it trades under an existing lease. The combined units will form a single, 82,000 sq ft (82,000 sq ft gross, trading at 66,000 sq ft) store incorporating general merchandise, a larger food hall as well as an M&S café. The new premises will be handed over to M&S for fit-out upon completion of the redevelopment at the end of 2020, with the store set to open in summer 2021.
 
It is an encouraging sign for vacancies such as this to be filled with a high profile name who already has a presence at Sears Retail Park, reflecting M&S’s satisfaction with this location – further evidence of the ongoing appetite from selected retail brands for the right space in the right location.

 

Risk Disclaimer

Past performance should not be seen as an indication of future performance.

The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

The value of directly-held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.

Opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

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