Retail property has traditionally been seen as a secure long term investment class, particularly prime High Street and best in class Shopping Centre and Retail Park Investments. Historically it has provided superior returns, long term stability and growth of income. It has also preserved residual value, allowed for diversification and enhanced the scope to deploy substantial capital in a single transaction. Nonetheless, with the emergence of e-Commerce and, and the slow recovery from the Global Financial Crisis (GFC) it has been difficult to maintain these attributes in new retail investment. The Covid-19 Global Pandemic has provided another major hurdle for Bricks and Mortar Retail to overcome.
Across Ireland and the world, the main focus of most retailers is now the scenario of re-opening, taking into account new legal requirements and best practice in health and safety to open efficiently without diminishing the shopping experience while at the same time returning to profit.
We are seeing retailer failures with others taking the opportunity to streamline portfolios and shutter underperforming outlets and focus on their better performing assets. These retailers are in the main from three retail sectors – mid market fashion, footwear and department stores with two common threads –
(a) that they have not, would not or could not adapt to the emergence of e-commerce retail and
(b) they have unsustainable debt and weak balance sheets.
Covid-19 has brought about a new retailing sub sector term, ‘Essential Retail’. These are the supermarkets, pharmacies, pet stores, and communications outlets etc who have been permitted to trade all through the lockdown. They are mainly confined to the convenience and service use classes. Interestingly DIY stores remained open in most European countries with Ireland being an exception here. However as of last week DIY stores are now trading again as part of Stage 1 of the governments re-opening programme.
Post Covid, we may see the gap and risk premium widen between prime and secondary retail assets. We will also see retail investors being more focussed on the actual risk profile of individual retail use classes in relation the e-commerce threat and risk of future pandemic lockdowns.
On a positive note the anecdotal evidence emerging to date across Europe is that where people are now revisiting stores they are spending with high conversion rates. We hear about “revenge spending” (in its simplest form an overindulgence in retail therapy to make up for time lost during lockdown) but it remains hard to evaluate this precisely. In China we observed in the first days of reopening that the lower footfall was partially compensated by a higher basket price. In Europe attention is now focused on Germany and Austria, which were among the first to reopen, in order to make sense of the spending trends across the various retail sectors and which are expected to translate to our market in due course.
Market Affect – Retailers
Retailers are currently focussed on agreeing rent abatements, deferrals or write offs with their individual landlords. They are trying to estimate the effect of the social distancing measures on their turnovers as and when they re-open and the impacts to their P&L’s. While for some sectors Covid 19 has had little or even a positive impact, recovery for many will be phased and gradual, and dependant on a number of factors including household confidence, customer health & safety concerns and how quickly we can move out of the inevitable recession. Another factor in the Irish recovery will be the reopening of international tourism which has yet to be established. Proposed plans of enforced quarantine for up to two weeks for international travellers, if implemented is a definite concern.
A major positive is that retailers are now in re-opening mode (See Graphic – Retail Reopening’s across Europe) and preparing for the ‘new normal’ retail retailing environment that will be in place in the short term. New safety protocols including but not limited to (in line with local government guidelines) will be in place:
- A limit on shopper numbers per sq.m and social distancing rules
- A safe queuing system for customers to enter
- Staff safety measures
- Body temperature checks
- Wearing masks in shops (masks are mandatory in several countries: Spain, Germany, Czech Republic and Austria)
- Limited business hours to allow for enhanced sanitizing and disinfecting
- One-way traffic patterns, where customers must follow a specific, marked path though the store with certain doors as entrance only or exit only
All in all, consumers may encounter a very different shopping experience from what they were used to before the spread of Covid-19.
Logically, businesses will then focus on analysing existing portfolios and consolidation and potential disposals. In terms of expansion and new leases, retailers are much more focused on risk minimization so asking for shorter lease lengths, turnover rents and break clauses. For example, in Europe H&M and JD Sports are asking for a special Covid clause, saying that in periods of pandemics tenants are not obliged to pay rent.
Market Effect – Investment
Prime locations are expected to suffer less from the Covid-19 impact than the secondary locations. Liquidity for prime assets should remain stable and only a slight adjustment if any is expected in main high-street locations and best in class Retail Parks. Prime locations having already faced other serious events in the past are likely to demonstrate their strong resilience in these circumstances again.
With high streets shut down and a large proportion of the population working from home, there is a greater appreciation for local communities and the vital role that retail plays in everyday life. This has re-affirmed grocery and well located neighbourhood centres as defensive real-estate investments and we also expect to see a stabilization and potentially some capital growth in these sectors.
For secondary locations already a struggling asset class, a more notable decrease in values is expected to reflect already flagging demand levels. Some investors may take the opportunity to (re)enter retail markets if decompression of prime yields occur in some selective locations. Re-pricing for shopping centres and secondary retail warehouses is expected, especially for non-core assets, providing opportunities for investors. This trend will depend on the leverage financing facilities availability which are key for value-added and opportunistic investors. Investors may be more attracted by assets pre-existing financing facilities in place.
In terms of how investors are reacting, most buyers are adopting a ‘wait and see’ approach with deals and processes slowing down, put on hold or at worst cancelled. Insurance groups and pension funds are internally re-pricing their acquisition criteria, arguing to reflect the higher risk inherent to the pandemic. They may be the best placed to take advantage of the situation, not being dependent on any financing leverage and acting opportunistically on an asset class that has rarely let them down.
All told, the crisis shall further enlarge the gap between prime and secondary assets, with exceptions pertaining to certain use classes which are more resilient to the threat of e commerce or to locations which will benefit from long term changing consumer patterns forced by the pandemic. Liquidity and likely re-pricing will strongly depend on the asset quality (location, turnover, vacancy and footfall). Whatever happens with Omni channel retailing and ecommerce, there will always be a place for the physical store with a new universe of opportunities arising for retailers and retail investors alike.