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UK retail sector sentiment to remain subdued but use of CVAs may have peaked

Capital Economics’ forecasts a 7% cumulative decline in retail rental over the next two years but has suggested that the use of retail CVAs may have peaked.

Amy Wood, Property Economist, at Capital Economics wrote:

“Given that CVAs lower the overall market rent and that those retailers who have been subject to a CVA are still at risk of insolvency, we think that retail rental values have further to fall. Admittedly, if retailer CVAs have peaked, then the impact on rents going forward should reduce. But we do not think that this will result in retail rental values stabilising in the near term.

“As CVAs lower the overall market rent, creditworthy retailers will also push for rent cuts, as has already been seen by Next and Primark. In fact, almost 40% of retail property is over-rented. As leases expire in the current environment of high vacancy, or in the case of retailer failure, this will put further downward pressure on retail rental values.”

CBRE says sentiment for the high street sector will remain subdued for the rest of 2019. There may be some uplift pending an orderly Brexit at the end of October, but it is likely to be 2020 before we see any significant movement in the market as values bottom out.

High street yields continue to expand with secondary assets jumping up 100bps in the last quarter, according to CBRE data.  All three sub-sector asset types are currently above the 10-year averages with prime high streets being the last to move above the line in April 2019.

High street investment volumes were £200m in the first half of 2019, CBRE data shows, reflecting very low sentiment in the market where available funds have significantly dried up.

Better performing sub-sectors such as F&B and Health & Beauty continue to outperform the wider market.  Expansion, albeit limited and more measured than ever before, will be driven by key consumer trends such as increased awareness of healthy eating and living, added CBRE.

Online F&B remains proportionally small compared to other sectors, with consumers placing more emphasis on convenience of physical locations. CBRE expects to see poorer performance in categories such as electricals and household goods, which are more at risk to the growth of e-commerce.

james.wallace@realassetmedia.com