Stockholm (Ekonamik) – The retail sector has embarked on a significant structural change in recent years due to the rise of internet shopping and changing consumer shopping behavior. Consequently, retail property such as shopping centers, retail parks, and high streets do not appear to have a bright future ahead. Is bricks-and-mortar retail dead, and are there any opportunities left in retail property?
Investors Predict Doom for Retailers and Retail Properties
An increasing number of retailers ranging from major department store chains to mattress sellers entered administration in recent years, highlighted by the demise of Sears, once the largest retailer in the United States. Ben Jones, Head of Real Estate Income at M&G Investments, confirms the threat posed by e-commerce. “Consumer habits are changing rapidly,” wrote Jones in November of last year, adding that “online shopping is fast becoming the norm both in the UK and worldwide, but not all retailers and brands are moving quickly enough to adapt to this new reality of increased competition from e-commerce.”
For that reason, 2018 “has been dominated by news of retail store closures and insolvencies, as some retailers grapple with dampened sales against the high costs of too many stores” according to Jones. Jack Neele, portfolio manager of the Robeco Global Consumer Trends Equities fund, believes the threat is more wide-ranging now than before. “The online revolution began with consumer electronics, books, CDs and those types of products, but has since spread to clothing, apparel-type goods, and has now started to move towards groceries,” said Neele around the same time last year. “The retail apocalypse has been spreading to more and more categories.”
Commenting specifically on retail properties in the United Kingdom, Adrian Benedict, investment director at Fidelity International, said in December that “what was once the most attractive real estate asset class is fast becoming its bête noire.” Benedict argued that “retail real estate would transform from a defensive, premium asset class into one of the most volatile elements in any real estate portfolio.” The Fidelity investment director said that “bricks-and-mortar retailers have had no choice but to cut costs in order to survive, and when doing so their options are limited.” He further emphasized that “rent is essentially the only key cost, amongst wages and supply costs that can be meaningfully reduced; leaving retail real estate investors in the direct firing line.”
Turning Threats into Opportunities
Although “the retail market is under pressure as it responds and adapts to the disruptive force of the internet on its traditional business model,” Justin Curlow and Vanessa Moleiro from AXA Investment Managers reckon that “retail is far from dead as consumers will continue to shop – only in a different manner.” The duo from AXA Investment Managers further argues that “brands which are able to adapt to the new “Omni-channel” retail model will end up in a stronger financial position, making them viable credit tenants for retail landlords.”
Mark Hawtin, Investment Director at GAM Investments, corroborates the duo’s view. “The disruption of the retail sector in particular is fascinating; it is no longer sufficient to purely be an online retailer,” Hawtin commented on the future of retail in April. “Five years ago, companies were commanding a huge premium as fast-growing, online retail brands. Now, online is just another route to market – it is essential to have an omnichannel presence,” he added. “We believe that retail stores are not just about bricks and mortar anymore – it’s about the multiple ways in which you sell to consumers and it’s very clearly shown that if you have an omnichannel strategy you tend to sell lots more products.”
Existing Opportunities in Retail Assets
With many retail assets expected to slide in value and limited rental value growth, are there any opportunities in this sub-segment of the real asset class? Justin Curlow and Vanessa Moleiro of AXA Investment Managers think “there is potential rental upside in the tourist-oriented second-tier city high street rental market, as retailers continue to target these locations and rents are substantially more affordable.” The duo views “regionally dominant shopping centers and second-tier tourist-oriented city high streets” as an attractive “value play” for investors, emphasizing that this segment provides “an opportunity to add incremental yielding assets as a portfolio diversifier in an otherwise yield-starved world.”
Supermarkets have not been caught up in the recent woes faced by retailers either. Ben Jones of M&G Investments said in November that their “long lease real estate team invests in the supermarket sector selectively to find attractive assets in dominant locations or competitive positions.” According to Jones, “these offer a defensive approach to investment in the retail sector and can supply investors with long-term, secure and growing income streams through leases to high-quality tenants.” Jones argues that assets in this sector “can deliver long-dated, typically inflation-linked income streams, given a significant proportion of goods sold by supermarkets sit in the inflation basket.”
On both sides of the Atlantic, demand for mixed-used property is also a growing trend. Real estate attorney Karen O’Malley, for instance, said “forward-thinking developers…[are] curating their tenant mix to attract a broad range of consumers.” Ben Jones said M&G Investments also favors “assets that have potential for alternative use, such as residential or mixed-use schemes, a defensive approach to enable the recovery of value from the land or property should the retailer leave the site.”
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