The last 18 months in retail, with Allan LockhartDigital Editor
Last week the Innesco team were delighted to welcome Allan Lockhart, CEO of NewRiver and Chairman of the recently formed Retail Committee at the British Property Federation (BPF) to our industry breakfast where he shared his views of the last 18 months in a keynote Q&A with Innesco Founder, Dan Innes.
In the Q&A, Allan acknowledged that as the owner of key retail assets including shopping centers and pubs, NewRiver has been at the sharp-end of the pandemic. Although the business has had to make tough decisions over last 18 months, the team have managed to successfully navigate various difficulties, and are now in a reasonably strong position to look forward with genuine optimism.
Here is a roundup of key takeaways from the discussion.
Consumer demand for hospitality has risen drastically since the lifting of some restrictions on the 17th of May, with NewRiver’s pub portfolio seeing higher like for like trading than pre-covid levels; a trend that doesn’t look likely to change any time soon. In fact, days after the event, NewRiver announced the sale of its Hawthorn Leisure community pub business to Admiral Taverns for approximately £222.3m; a sign that competition amongst inventors in the pub sector is heating up
In terms of retail, the Q&A highlighted the challenges the sector was experiencing before the pandemic due to the over-supply of retail space. The imbalance between supply and demand can explain why retail has faced higher vacancies, falling rents, falling capital values and falling confidence. According to Allan, we can expect this pre-Covid trend to continue as we begin to emerge from the pandemic.
However, in the short-term, retail is likely to benefit from an economic bounce-back with consumers who have underspent during lockdown flexing their spending power. This will lead to economic growth initially, but in the long-term the retail market will sink back to low levels of growth.
BPF Retail Committee
The BPF founded the Retail Committee in the early months of the pandemic with the aim of improving the voice of those who own retail real estate in the UK and to aid communication with stakeholders including tenants and central and local government. There are many major issues that will have a profound impact on the sector, and it is important that the ownership community ensures its voice is properly heard and taken seriously.
What issues are facing the sector?
The BPF realise that business rates are an area that need critical reform and there is currently genuine alignment between occupiers and owners. Other key issues on the agenda are government’s consultation around the review of the commercial relationship between owners and tenants and the environmental performance of assets. Companies are beginning to announce their own pathways to deliver carbon free emissions from their assets, but retail property faces significant challenges with regards to environmental performance as the sector is still heavily reliant on their tenants.
NewRiver is seeing many equity investors increasingly focused on environmental performance, as is the credit market. Capital is becoming more available to companies who have a clear strategy to improve environmental performance. For companies that don’t adopt such policies, access to capital will become more restrictive and costly.
Factors for driving growth
Retail still offers the best risk adjusted returns in the market as valuations have been significantly rebased. Careful stock selection, smart asset management, and development are the areas to focus on to achieve growth.
Development will become an increasingly important feature of the market as currently 43% of retail locations in the UK are oversized by 30% on average. Without intervention, this will increase over the next ten years to 60%. This presents a great opportunity for the market to re-adjust.
The private capital markets are adjusting to this change and are already focused on projects that are viable, but the public sector needs to step in. The government is responding with the Levelling Up Fund and the Shared Prosperity Fund which is replacing the EU regional grant aid revenue. However, it is still to be determined as to whether this money will be spent wisely.
Finally, Allan addressed the issue of business rates, calling on the reform of business rates, including stamp duty, to enable and drive growth. Allan argued that retail should not pay stamp duty on capital transactions and leasing transactions calling it ‘ridiculous’ – the government should be encouraging capital not deterring it.
It is undeniably a critical time for retail property with many moving parts that will shape the industry for years to come. We’re grateful to have Allan’s insight, and for the work being done by industry bodies like the BPF Retail committee to shed light on the issues that matter and guide the sector into recovery.
Becs Danner, Editor and Copywriter, Innesco