Colliers CRE today announced that its 2009 Midsummer Retail Report forecasts that rental values will fall by 23% by the end of 2010. The worst economic recession since the 1930s has taken its toll on the retail sector with capital values for some properties falling by up to half, eradicating many investors' equity and making banks the owners of many shopping centres and high streets.
At its peak at the end of 2006, the entire retail sector was worth around £93 billion (IPD). This fell to £60 billion by the end of 2008 and Colliers CRE forecasts it will fall to £48 billion by the end of 2009. However, the free fall in capital values is now over, the market has fractured into a veneer of bond quality properties let to good tenant covenants and on reasonable unexpired lease terms where investor demand is strong.
The remainder of the market remains susceptible to tenants of a mixed covenant status where capital values are likely to fall further. Central London, the large, dominant in and out of town regional centres and the much smaller market towns are faring the best, as they did in the 1990s. Discount retailers and those with very strong brands are also trading much better than those in the middle ground who cannot appeal on price or quality to an ever more discerning market.
Landlords appear to have learnt the lesson of the early 1990s, in part forced upon them by the Government's implementation of full vacant rate payments and are now prepared to keep units occupied almost on any terms. Rent free periods and/or incentives equal to two or three years are common place with extreme examples of five or even six years rent free being accepted. Short term leases on a turnover basis are often being entered into but at least the occupancy of a unit helps maintain vibrancy and a feeling of well being in shopping centres and high streets.
In the year to May 2008, prime retail rents had increased, on average, by 1.1% in Great Britain. This year's figure, however, paints a very different, and somewhat gloomy, picture of the in-town retail market with rents falling by -12.2% during the 12 months to May 2009 – the largest ever decline in the 22 year history of Colliers CRE's retail rents monitor. This is based on net effective rental values, reflecting rent free periods and capital contributions generally required by retailers which have significantly reduced the headline rents being achieved.
This is the first drop in prime rents since the recession of the early 1990s, when rental values fell for three consecutive years from 1991 by -2.4%, -4.1% and -3.2% respectively, highlighting the comparative severity of the current economic climate and its impact on the retail market.
In real terms, however, when inflation (RPI) of -1.1% is stripped out, the annual fall in rent is marginally better at -11.2%. It is again the largest fall on record, although there was also a significant drop of -8.1% in 1992.
Russell Francis, Head of Valuation at Colliers CRE said:
"If 2007 and 2008 were the years of yield weakness, 2009 and 2010 will be the years of rental value falls.
"While not out of the woods yet, market sentiment has improved to a degree in recent weeks as yields for the best quality investments harden and retailers fortunes slowly but surely start to improve. The flood of retail failures prior to and shortly after Christmas 2008 has been stemmed and although few would suggest there will not be further casualties, occupier demand is surprisingly buoyant. The issue is the terms upon which retailers are prepared to let a unit."
New retail development has virtually stopped. Overall, the shopping centre development pipeline is a meagre 8.6 million sq ft to the end of 2013. Just three years ago, the market was predicting a total of 26 million sq ft for the same period. This significant break on the supply of new accommodation combined with a recovery in occupier demand could lead to a relatively quick contraction of concessions and a rise in rents in three years time.
Colliers CRE forecasts that economic recovery will occur in 2010 although its strength will be modest and there will still be some quarters when growth will come to a standstill. Unemployment and personal taxation will rise; squeezing consumer expenditure but a positive total return for the retail market of 8.4% is forecast in 2010.
For more information contact our press office:
Natasha Sunderland Head of PR +44 20 7344 6641
Jacqueline Whitaker Associate Director +44 20 7344 6706