UBS expects more liquidity will return to the retail sector in 2020; however, this is likely to be heavily driven by the higher quality segment of the market, and predominantly from retail warehouses.
Zachary Gauge, European Research Analyst, at UBS Asset Management, explains:
“For this sector and level of quality we may therefore start to see values stabilize in the second half of the year as transactional evidence provides a basis for the bottom of the market. However, structural challenges mean that rental declines are likely to be more drawn out and these will continue to be factored into a discounted sale price.
“Aside from the more core and dominant assets we believe the outlook remains extremely challenging for the foreseeable future, and that it will continue to be difficult to put a realistic value on secondary and tertiary retail. And if the listed markets can be used as any kind of guide, there is still substantial room for further downward movement before we reach any kind of floor. Our expectation is that retail will continue to struggle in 2020, with a negative total return of 3.9%, which makes us more bearish than the most recent consensus forecast of negative 2.7%.”
While the industrial/logistics sector was comfortably the top performing traditional sector the pace of capital growth has dropped to around 2% from the double-digit levels of previous years. The sector is now the lowest yielding of all the UK segments – ironically just two years ago this was the retail sector – and it is becoming increasingly hard to underwrite deals at even higher prices, particularly as the pace of rental growth has also eased back. It remains positive, but 2019 was probably the first year that affordability constraints in some parts of the market started to kick in.
Zachary Gauge added:
“The increased competition from ecommerce-related demand has pushed rents up for more traditional occupiers, but these companies ultimately have a ceiling for occupational costs which they can pay and remain profitable. We have started to see some companies forced into relocations as they simply cannot compete with the rental levels being paid by the logistics firms who can justify seemingly ever higher rents by the efficiencies gained and continual demand for ever quicker delivery services. So we are now seeing a greater gap emerging between the top rents in the market and the more average level, which can be afforded by the traditional occupiers, and it is in this area that affordability constraints will really start to limit rental growth in 2020. Industrial occupiers will also be aware that the next business rates revaluation will come into effect in 2021 (based on 2019 values), and given the significant change in rental values since the last assessment in 2015 there will be a further significant increase in occupational costs particularly in London and the South East.”