IT'S not often you find a property consultant who isn't determined to talk up the market, but when it comes to retail, the harsh view of Roderick Pearson, a director of Colliers CRE, is startlingly honest.
"If last year was the flight from shite,
this year we are well and truly in it," he says.
The firm's annual Midsummer Retail Survey for Scotland, unveiled last week, found "very few bright spots" on the horizon for retailers and, as a result, landlords and commercial property investors over the next 12 months.
Last autumn, in a flight to safety, investors clambered to get their money out of funds which invested in commercial property, including retail, but such a reaction to market turmoil made the situation even worse.
While most commentators expected a correction, few anticipated the severity of the effect of the sub-prime mortgage crisis. Pearson says: "The ensuing credit crunch has brought the investment market to a grinding halt – the banks have turned off the taps."
Alongside the lack of liquidity, there has been little growth in the rental value of retail property. Figures from Colliers reveal only a 1.1% rise in prime rental values in UK towns over the past 12 months, the lowest increase for 15 years. In real terms, rents have fallen by more than 3% in that period and are 12% lower than they were in 1989.
The situation is likely to get worse before it improves. Andy Clarke, a director at Colliers, says: "The bottom of the market is still 12 months away." His forecast is that the total return on investment for the entire retail market will be -9.1% this year and that rents on the high street will fall by a further 15% to 20% over the next five years.
It is not difficult to work out why there is such pressure on the retail sector. Consumers are feeling the squeeze more than they have done for years with higher mortgage payments, spiralling utility bills, the price of oil reaching new record highs on an almost daily basis and less credit available. Figures out last week from the CBI for June revealed disappointing high street sales for the third consecutive month.
Now that midsummer has been and gone, most experts see few rays of light on the horizon for retailers and their landlords. At the unveiling of Colliers' report on Tuesday, Dr Richard Doege, director of research at the firm, said: "It is really difficult to provide many positive signals with a weakening economy, further pressure on disposable income and discretionary spend, house price falls and labour market concerns."
What is surprising is that more retailers have not gone into administration, according to Colliers. The most high-profile failure to date this year has been fashion store Internationale and its Au Naturale home furnishings brand which had 91 stores across the midlands, northern England and Scotland.
However, Chris Humphrey, associate director with Colliers, said a sign of resilience in the market is that within a month all its stores were taken up by other retailers. "Further casualties may not fall so lightly," he warned.
Such failures may be imminent. Stuart Moncur, of Cushman & Wakefield, another property consultant, said he is expecting a number of administrations to emerge over the next few weeks. This will result in more retail units becoming vacant, adding to the current problem of over-supply of properties that is swinging the market heavily in favour of tenants away from landlords.
No landlord wants a property lying vacant, particularly now the new empty rates legislation in England and Wales has already raised £215m for the government and there is no guarantee it will not be replicated north of the border.
Tenants are using their new-found bargaining power to demand better deals from their already struggling landlords and this trend is set to intensify. John Duffy, a director of in town at Colliers, said: "We expect many retailers to demand concessionary terms – including even incentives – if they are to stay put."
He gives the high-profile example of Sir Philip Green who has taken the hard line that he will not agree to deals if landlords push for large increases in rent when they go to renew their lease. In some towns, good to his word, he has closed units.
Green is in a position where he can call the shots, and some other big-name retailers will be able to use their position and popularity with consumers to gain from the pressure the credit crunch is putting on rivals.
This is where supermarket giant Tesco comes into the equation. It has increased its dominance over the years, with the aim of having a store in every UK post code area. It has increasingly managed to differentiate itself from competitors by selling everything from beans, to scuba diving gear, to flat screen TVs and iPods under one roof in its Xtra stores. But some say its next move to conquer the retail world will be to establish high street department stores, taking on such household names as Debenhams and John Lewis.
Duffy said: "The prospect of Tesco department stores could be a possible welcome, if scary, addition to the market."
A Tesco spokesman said: "Government policy encourages us to consider town centre locations for future development. Finding enough space is becoming increasingly difficult in these locations. We would consider town centre sites where there was adequate provision for parking and customer facilities."
But all is not rosy, even for Tesco, which is expected to have the biggest problems of all the supermarkets with the Competition Commission's new "market share" test. One fund manager said he is planning to take investors' money out of Tesco and put it into Morrisons where he sees more potential for expansion.
On the subject of supply of shopping centres and other large retail developments, Colliers is more upbeat than some commentators, with Duffy saying that "the Scottish picture is more favourable than the national one which is in danger of oversupply".
Niall Macdonald, director of retail of Jones Lang LaSalle, said: "I fundamentally disagree with the view that there won't be an oversupply of shopping centres over the next few years."
He gives the example of Aberdeen Galleries, proposals for St Enoch in Glasgow and centres in Livingston, Dumbarton and Cumbernauld where units are still to be taken by retailers.
And the out-of-town retail sector in Scotland is expected to be in for a rougher ride than most city centres, because of the developments in the pipeline, such as the planned extension of Edinburgh Fort.
The effect of the credit crunch will also vary between types of retailers, with food stores, mobile phone shops, garden centres and coffee shops expecting to fare better than mid-range clothing retailers and electrical outlets.
Cheaper food stores are coming into favour, with figures from TNS Worldpanel last week revealing that Aldi and Lidl saw their sales rise by 20% and 14.9% respectively in the month to June 15.
It is not just the credit crunch that is affecting bricks and mortar retailers, there is also the increasing threat of the internet. Total online sales grew 35% in 2007, and, over the next five years, they are predicted to triple to more than £44bn.
The rest of this year and into 2009 will be tough for retailers with more "to let" signs likely to appear on our high streets and in our shopping centres, but adventurous investors are the ones that could benefit through "opportunity" or "vulture funds" which are currently snapping up retail commercial property bargains.
The full article contains 1294 words and appears in Scotland On Sunday newspaper.
