A week in retail and property is a long time. With the next few days including Black Friday and Cyber Monday on Monday!
During the last week I have had the benefit of attending the IPD/IPF Investment conference in Brighton, reading the Chancellor’s Autumn Statement and releasing the latest Health Index that LDC has developed in partnership with Morgan Stanley.
All of these events play nicely into answering the question: Where is the retail and property market heading?
Investment in 2015
2015 has been a hot year for the investment market, but in many respects, for a variety of reasons depending on your area of interest.
Central London yields have been compressed by serious amounts of foreign money looking for a safe home where safety is the primary driver and not capital growth or income return. This is a very different investor to the traditional REIT or fund that invests for the other reasons and increasingly this is going towards income growth.
The same is true in parts of the occupier market where higher than market rents may be paid to get a certain shop for marketing purposes or to keep out the competition. Brands such as Nike, Apple, Adidas and Nespresso are examples of this and in another arena it might be the likes of Nando’s or Five Guys.
London and what is now called emerging London (typically within the M25) are strong and this appears to be across all sectors with a new and relatively unique interest by large funds and developers in residential property.
This is a big change as for many in Greater London the only option is to rent. So are we on course for a more Germanic market where big landlords control much of the housing stock?
There is also no doubt, in my view that, mixed use schemes are the ones that will last the test of time and provide the work/life balance that the millennials are after. This is assisted further with the new transport infrastructure.
Pricing pressure is being driven by the likes of Norges who have increased real estate investments from 5% to 15% and that $96bn has been raised in the last year (globally) by Private Equity Real Estate.
Energy is often a big drive in inflation and thus has wide ramifications both on the occupation of property from both a commercial and consumer point of view.
Historically it has always been a sure bet that whilst there have been lulls in energy price rises it has always been inevitable that they would go up.
However, according to Professor Nick Butler, this may not be the case as he gave a fascinating insight into energy consumption and pricing.
Oil remains below $50 a barrel and is set to remain low. Believe it or not, demand is falling in Europe and in the US. It is China who are now a major consumer of energy and use 22% of the world’s energy consumption every day!
Shale gas accounts for 25% of all gas in the US now and renewables are starting to have a greater impact.
The bottom line is that now there is more supply than demand and it is a buyers market. Even Saudi Arabia is announcing its first austerity budget – who would ever have placed a bet on that?
The world’s population is growing and the UK is no exception, with London leading the way. London’s population has reached 8.6 million and is forecasted to grow to 11 million by 2050.
The competition between property use types is therefore fierce, especially in London and the South East where residential values have hit such a level that some landlords are terminating shop leases and converting their shops into residential property.
In London’s most central borough, Westminster, 5% (4.4 million sq. ft.) has been converted to residential between 1996-2010. This trend has continued with a further 1.8 million sq. ft. of Westminster office space becoming residential.
A more amazing stat is that since 2012 79% of all private sector jobs have been generated by London. This is the driver but it does beg the question of what about the rest of the UK?
How we measure performance of locations therefore has to change in my view.
What we measure and how we measure has to be rational and looking at values alone is not a good benchmark as the market, as explained above, has changed fundamentally.
Lease and sale data along with the structure of leases is more complex and therefore less transparent than ever before.
LDC has worked on this alongside its customers such as Morgan Stanley and its university partners such as University College London, Oxford University, Liverpool University and Stirling University to see how one might better analyse how places are changing and how this can be measured.
We are looking at diversity, e-propensity, economic health, footfall and a range of other measures to see what can be determined.
Three years ago we developed a Health Index of places with Morgan Stanley, initially just towns, but in the last two iterations we now include over 3,000 unique locations be they town centres, shopping centres or high streets.
Work undertaken with customers as well as Masters dissertations have shown this index to be the best indicator of performance. A breakdown and explanation of the index can be seen here but essentially it takes 12 key measures, analyses them to the location type (relevance) and then creates a score, which is then indexed by location type to between 1 (poor) to 10 (excellent).
Finally, the long awaited Autumn Statement was delivered this week with some expected news and some unexpected news such as tax credits.
The main news from the retail and property perspective was around house building, buy to let and business rates.
On the most contentious issue of business rates – small business relief was kept but the anticipated announcement of the review was pushed out until next year.
The Chancellor, however, confirmed the devolution of business rates to local authorities which many would argue is good, but others might argue that it will create an unfair competitive playing field whereby some local authorities can incentive occupiers through business rate cuts which others cannot afford, This might result in a move of occupiers to lower business rate destinations. Only time will tell.
On the house building front the house builders have a big incentive to build new homes but the structure of ownership will be interesting in light of plans to increase stamp duty on buy to let properties which have been a significant driver of demand and pricing levels.
So much has happened in the past 7 days and the fall out from Black Friday and Cyber Monday has yet to be seen.
What we do know is that retail sales will rise but how genuine are the discounts and how affordable are such promotions for retailers who have very little margin already.
Is it survival of the cheapest or survival of the fittest (profitability) – it has to be the latter as a race to the bottom is no good for anyone.
Just ask any supermarket CEO!