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Nuveen: UK retail asset demand has almost completely disappeared

The increasing erosion of in-store sales from the growth of e-commerce has further to run in the UK with the pain likely to increase, says Nuveen, while other markets still have 4-8 years to run until online sales reach a high enough level to tip the occupier market into decline.

Stefan Wundrak, Head of Research, Europe, at Nuveen Real Estate, explains:

“The downturn will be greatest in markets where broadband availability is high and consumers are happy to use a card instead of cash. Food sales are, however, proving highly resistant and retail formats with strong food grocery anchors and innovative F&B offers continue to outperform.

“Shopping centre prime yields are also rising in France, Spain, Italy and Germany, but retail warehouse yields are firmer and have sharpened further in Germany as convenience retail continues to attract support.

“Prime high street assets are generally holding firm, except for Brussels, the Netherlands and regional cities in the UK and Spain. Europe’s strongest high streets were the best performers of the post GFC retail bull market, and the easing back in monetary tightening in the UK and eurozone will underpin support for these assets from non-institutional investors.

“With the market outside the UK only just entering a correction phase, the window has not yet closed to dispose of non-core assets before pricing deteriorates even further. But with potential sellers unwilling to crystallise losses and finance still available on retail assets, it is still too early for bargain hunters to enter the market. However, we believe finance will become more difficult to secure.”

Retail rental values are expected to fall further amid an oversupply of property, according to Andrew Burrell, Chief Property Economist, at Capital Economics. “However, once this oversupply is reduced, solid rates of consumer spending growth should spark a recovery.”

Burrell continued:

“Regardless of the Brexit outcome, we expect all-property returns to be squeezed as a result of weakness in the retail sector. However, as Brexit could dramatically alter the near-term outlook for the economy and UK commercial property, we are publishing three sets of all-property forecasts based on different Brexit outcomes. Under a no deal, returns could contract in the near-term, as property yields jump and rental values are hit.

“But, cuts to interest rates would prevent further rises. If a deal is secured, we expect higher interest rates to put upward pressure on yields and cause sharper falls in capital values from next year. If Brexit is repeatedly delayed, yields could increase a bit more in the near term but we would expect interest rates to rise by less. Nevertheless, under any Brexit scenario, the economy could be growing around 2% y/y by 2021, which would support a recovery in all-property rental values.”

Capital Economics note can be read here.

james.wallace@realassetmedia.com