“£180 billion of lockdown savings”, “Retail sales back to pre-pandemic levels”, “High street footfall shows signs of recovery” (Source: Financial Times, BBC, Modern Retail). While the positive headlines surrounding the reopening of the retail sector is a welcome change from the ‘death of the high street’ narrative, whether the combination of reopening and pent-up consumer demand truly represents a pathway to normality for these embattled sectors is questionable. 

So, first, what do the numbers from reopening, rather than the headlines, tell us? Footfall in the first two weeks of reopening suggested consumers returned to shops faster than after the first national lockdown in June 2020; however, footfall remains materially down versus pre-pandemic levels, with significant variations by location type (-22.8% versus 2019 levels for the week ending 15 May: source: ShopperTrak). Meanwhile, ONS data for April found that retail sales volumes were up 12.4% versus 2019 levels, substantially ahead of the three-year pre-pandemic average of 2.4%, with non-food store sales up 3.9% and the internet accounting for 29.4% of all sales, versus 19.1% in February 2020. Finally, UK restaurant reservations in the first week post-indoor settings reopening were 42% ahead of 2019 levels (Open Table, State of the Industry). While it remains early days, this tells us three things: 

1. There are signs of materially higher levels of consumer spending which, while benefitting both stores and online channels, will be spread unevenly across operators and locations
2. Higher levels of e-commerce sales, which have accelerated during the pandemic, are likely to endure
3. Despite ongoing capacity restrictions, consumers’ appetite for experiences and leisure look to be particularly strong

While the reopening of the sector is on track and should herald a return to more normal rental collection levels in the second half of 2021, reopening ultimately represents a double-edged sword. Government support for occupiers is scheduled to be phased out over the summer and we anticipate that a combination of reduced financial support and sluggish occupational demand means that vacancy levels are likely to continue to rise.

Consequently, we believe that the structural challenges facing the retail sector, namely an over-supply and over-rent of poor-quality retail space, will continue to result in the underperformance of retail relative to all commercial property sectors. 

“We anticipate yields will begin to stabilise over the next 12 to 18 months, as evidenced within the retail warehouse sector”

We do, however, expect the drivers of retail property returns to shift. Outside of supermarkets, the re-rating of UK retail yields in recent years has been universal and justified, reflecting a sector that now has a fundamentally different risk and income profile. We anticipate yields will begin to stabilise over the next 12 to 18 months, as evidenced within the retail warehouse sector. This will result in attention increasingly shifting towards the income on offer and as a result, the fundamentals of individual assets will result in greater polarisation in outcomes for investors into retail property. 

There are three primary factors to consider when thinking about the fundamentals of a ‘retail’ asset: 

1. Alternative use underpin: the retail sector remains over-spaced, but finding viable alternative uses outside of London and select areas of the Southeast remains challenging. Multi-sector expertise remains key to unlocking opportunities.
2. Income resilience: we anticipate that rents will be the primary drivers of retail returns over the coming years. This has two implications for investors: understanding the sustainability of rents at an asset level is vital, as is managers proactively creating a more diversified ‘retail’ income stream by generating new revenue sources from non-traditional retail uses 
3. Asset relevance: in recent years, retail has seen footfall decline and vacancy levels rise. This suggests that the sector has a relevance issue in the eyes of both occupiers and the end consumer. Assets need to serve a broader purpose to consumers beyond selling products and owners need to encourage a broader range of future-facing occupiers by offering greater lease and use flexibility. 

These are all areas where managers of retail property can and must take on a proactive role. Future-fit environments require greater operational expertise, along with more dynamic, data-driven insights into consumer behaviour and occupier performance. Assets need to be remodelled in a way that creates a more varied environment for consumers, a profitable business line for occupiers and a diversified income stream for investors. In the process, there is a real opportunity to remodel assets in a way that deliver longer-term positive social impact for local communities. 

The road to recovery for retail will not be quick and investors looking to buy into a retail recovery story should do so with care. A new operational reality for owners is here to stay.