Physical retail - "Rumours of my death have been greatly exaggerated"
The thoughts and outlook from Orchard Street Investment Management, manager of the St. James's Place Property Fund. 10 July 2020.
This quotation, attributed to Mark Twain upon reading his own obituary in a newspaper, might seem appropriate too in the context of media coverage of the retail sector. Whether vacant shops in town centres, the death of the high street or tenants going into administration, one might be forgiven for thinking that all is ‘doom and gloom’. Even pre-COVID, anyone might think reading these stories that retail spending had collapsed, and that physical retail had been all but supplanted by the online sphere. Such an outlook, however, misses the mark. In fact, retail spending (prior to lockdown) continues to increase, and 80% of all retail transactions still involve a physical property.
Lockdown shut the vast majority of retail stores, and spending fell dramatically as a result. Fashion has been hit particularly hard due to the rapid turnover of seasonal fashion lines and lead times for delivery of merchandise from often distant manufacturers. Food stores and ‘discounters’ (for whom food was a substantial part of their offering) proved an exception, seeing sales rise sharply as customers stayed at home and restaurants were closed.
Many food stores are either stand-alone, out-of-town supermarkets, or sited in a retail warehouse park where large floorplates and car parks have proved convenient for ‘safe’ shopping in a new, socially-distanced style of retail. These out-of-town retail warehouse parks dominate the retail exposure in the St. James’s Place Property Funds – though it should be noted that St. James’ Place faces less exposure to the retail market as a whole than the benchmark.
As the lockdown gradually unwinds, we expect the UK retail market to recover gradually over the next 18 months as consumer spending returns to previous levels and resumes its longer-term growth trajectory thereafter. During this period, we expect that it will be retail warehouse park assets which prove, as in the years before the crisis, to be more resilient and adaptable to the new retail environment.
Structural Change in the Retail Sector
Notwithstanding Covid-19, though to some extent accelerated by the virus, the retail market has been experiencing structural changes for some time. Our investment and asset management strategies continue to be heavily influenced by how we see these structural changes evolving.
For Retailers, change is not just limited to product types and designs – consumer behaviour has become increasingly polarised between goods where price and convenience are key factors (‘needs’), and other goods and services where the purchasing experience is becoming more important (‘wants’).
Retail warehouse parks and supermarkets have not been immune to competition from the internet, but have continued to be more resilient than other retail formats, recording stable or rising footfall as compared to high streets and shopping centres where footfall has fallen. Retail warehouse parks have also proved more resilient throughout the lockdown.
In many ways, this is because Retail warehouse parks have become complementary to increased spending on the internet. Retailers hold more flexible units on retail warehouse parks with large floorplates which can easily be re-configured. They can store and display a greater range of products, acting as a ‘showroom’ in advance of a purchase either on site or by way of a subsequent ‘click and collect’ purchase online. For consumers they offer convenient access with large, free car parks.
Click and collect is, in fact, the fastest-growing component of many retailers’ sales, with 68% of internet orders picked up from a physical store by customers who may prefer to bypass the delay or inconvenience of delivery. There can be further associated benefits for retailers, with 85% reporting that click and collect customers buy additional items when coming to collect an order. The ties between physical and online retail are also seen in the ‘halo effect’ reported by many retailers, whereby opening a physical store results in concurrently increased online sales, and vice versa.
The structure of the UK retail market has been changing for some time, and the pace of change has accelerated with the onset of COVID-19. Over the coming years we expect to see a considerable contraction in retail space in small and medium town centres but, for all the reasons outlined above, we continue to believe that Retail warehouse parks have an important role to play in the new and evolving retail environment. Current pricing is very attractive, offering a high current income premium to other parts of the market.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The Property fund invests in assets that may at times be hard to sell. This means that there may be occasions when you experience a delay or receive less than you might otherwise expect when selling your investment. For more information on risks, see the prospectus and key investor information document.
The opinions expressed are those of the fund managers listed above and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
* Barclaycard / GlobalData October 2019