Retail Property Market Outlook 2020: our expectations for the coming year

Knight Frank’s predictions for the retail market in 2020, contrasting HY results from Sports Direct, Dixons Carphone and Superdry.
Written By:
Stephen Springham, Knight Frank
6 minutes to read

Largely positive interim figures from Sports Direct. Group (i.e. including HoF) pre-tax profits surged +160% to £193.4m in the 26 weeks to 27 Oct, driven by the performance of its “premium lifestyle” businesses. The bottom line was also boosted by the £84.9m sale and leaseback of its Shirebrook headquarters. Underlying EBITDA advanced +21.8% to £181.2m (+15.1% stripping out the impact of new acquisitions and currency movements). Group revenue increased +14% to £2bn over the six-month period, with sales from premium brands Flannels and House of Fraser improving +79.2% to £282.6m. However, stripping out the impact of acquisitions and currency movements, group sales were down 6.4%. Sales made through its core UK sports retail division grew +6.2% to £1.2bn.

A difficult mobile phone market and a wider transformation programme conspired to depress headline figures from Dixons Carphone. Sales fell 4% to £4.7bn and adjusted pre-tax profit slumped 60% for the half-year period to 26 Oct. UK and Ireland electricals revenue slipped -1% during the period to £2bn, on the back of flat like-for-like sales, Despite the performance, CEO Alex Baldock said the retailer’s transformation plan is “on track” as it looks to break even in the mobile sector by 2022.

A similar rebuilding story at Superdry. The former market superstar slumped to a loss of £4.2m in the 26 weeks to 26 Oct, while sales were down by -11% to £369.1m. This was against a profit of £26.4m in the same period the previous year. Founder and CEO Julian Dunkerton said the performance “reflects an expected year of reset, as we address a number of legacy issues across the business”. The decline in sales was a result of fewer promotions as the business looks to trade at full price and rebuild its brand.

Stephen Springham, Head of Retail Research:

In what will be the last Retail Note of the year, a look ahead to our expectations for the retail market in 2020. And a shameless plug for our newly-released Retail Property Market Outlook 2020 Report.

In terms of the numbers:

- The Economy - UK GDP forecast to grow by 1.0% with RPI inflation easing to 2.5% on the back of a recovery in Sterling. Short-term interest rates fairly stable at 0.85%. Retail sector buoyed by strong employment markets – employment growth of 0.4%, an unemployment rate of 3.8% and average earnings growth of 2.9%. Relatively modest growth in consumer spending of 1.2%, again significantly outperformed by retail sales value growth of 3.5%.

- Property Performance - All Retail Property forecast to achieve total return of just 1.1%, depressed by further depreciation of capital values of -4.0%. Forecast rental decline of -2.0% across the retail sector; Central London achieving positive rental growth of +0.5%, standard shops elsewhere in the country declining by -4.0%, retail warehouses by -1.8%, shopping centres by -2.3% and supermarkets -0.9%

- Property Pricing - Softening of yields across the retail market. prime shops moving out to 6.00%, regional shopping centres to 6.50%, open A1 OOT fashion parks to 7.00%, solus bulky retail warehouses to 7.50% and foodstores (with RPI increases) more stable at 4.25%.

- Longer Term Prospects - no return to underlying capital growth until 2022, although this is likely to come sooner for some assets (especially out-of-town) through yield correction. Annual average total returns between 2020 and 2024 are forecast to be 4.9%, despite a 5 year annual average capital decline of -0.3% and 5 year annual average rental decline of  -0.1%.Retail remains a solid income play, with annual average income returns between 2020 and 2024 of 5.3%.

In terms of general expectations:

The retail landscape in 2020 (and beyond) will be defined by 6 “Ps” – Perspective, Purpose, People, Place, Profitability and Pricing.

- Perspective: the UK retail market is not going to a stage a Lazarus-style recovery, nor is it a case of waiting for the storm to pass. At the same time, the high street most definitely has a long-term, sustainable future and it is short-sighted to write off the whole retail sector as many are doing.

- Purpose: forget the rather flowery buzzword “experiential”, the keys to retail locations’ sustainability are relevance and a sense of purpose. Without these two things, retail will struggle. In many cases, this purpose must be redefined and will invariably mean different things in different locations.

- People: the lifeblood of any successful retail location. Where there are bodies, there is spend potential and related retail/F&B need. Transport hubs and office-based locations in particular provide a substantial consumer demand base upon which to build a prospering retail proposition.

- Place: if a town or location doesn’t benefit from a captive audience or high passing trade, it must work that much harder to become a retail destination. It must create a sense of place that makes shoppers want to visit, through a combination of aesthetics, public realm and an imaginative mix of retail/F&B/A3.

- Profitability: retailers have undertaken their own “bonfire of the vanities” and are much more selective in their location planning requirements. There is a far greater pre-occupation in understanding the profitability in each and every site, coupled with that store’s role in a wider multi-channel offensive.

- Pricing: capital values have rebased dramatically across all retail property market segments. Such drastic price revision will make retail increasingly good value versus other property investment classes. But effective stock selection (and understanding the other “P’s”) is a pre-requisite now more than ever.

In terms of 2020 specifics:

On CVAs:

What we’d Like to See

Fewer CVAs come to pass, averted by proactive and adult dialogue between landlords and tenants. Retailers ultimately realising that CVAs don’t provide a “quick fix” and are very damaging to their brands.

What we’re Likely to See

Further CVAs, including a number of second-time offenders. As landlord challenge to the CVA process mounts, a move back towards pre-pack administrations, only slightly the lesser of evils.

On Business Rates:

What we’d Like to See

A full, root and branch review of the antiquated business rate process and creation of a level playing field with the online pure-players. Any shortfall in potential business rate revenue recouped through tech companies paying an equitable rate of corporation tax commensurate with their turnover.

What we’re Likely to See

Government continues to pay the issue lip-service at best and not fully understand the realities of modern day retailing. Any additional relief likely to focus on units with low rateable values, rather than those at the other end of the spectrum, where the issue and pain is actually far more acute.

On Sustainability:

What we’d Like to See

ESG to rise up the agenda. Growing social awareness of the unsustainability of many aspects of online shopping, particularly the carbon footprint realities of ‘last mile’ logistics. Retailers and consumers proactively addressing the growing issue of product returns.

What we’re Likely to See

ESG to rise up the agenda, but with an overriding focus on packaging, waste and product sourcing, rather than online logistical issues.