An insight into the UK retail sector
The UK’s retail construction sector has evolved over the past two decades, with output now accounting for 20 per cent of the £22.1 billion commercial construction sector, down from as much as 28 per cent in 2003. Amandeep Bahra, an economist with the Construction Products Association looks at the changing landscape in the retail sector.
The retail sector has experienced periods of instability since the 2008 economic downturn, the one bright spot in the outlook for the sector is a positive economic backdrop. However, unlike in previous years where activity was largely driven by major supermarket expansions, the retail sector is undergoing structural changes. These changes in consumer behaviour and advanced technology are playing into multi-channel retailing that will reshape the sector going forward. London continues to be subject to rental growth pressures due to an undersupply of high profile retail space (chiefly in the West End) and rental growth in regional markets is expected to pick up. Looking ahead, positive growth is expected in the retail sector, although obstacles still stand in the path of a sustained recovery.
Economic prosperity felt on retail sales
Despite a weaker than expected start to the year, the UK economy was the fastest growing advanced economy in the world in 2014. Growth has primarily been fuelled by consumer spending, which in turn has benefited from a combination of historically low inflation and interest rates and a small rise in real wages. Following growth of 2.8 per cent in 2014, we expect this rate will be sustained in 2015.
CPI inflation fell to -0.1 per cent in April, as the effects of low oil prices continued to feed into the retail supply chain. In line with healthy economic growth, labour markets have continued to strengthen. The employment rate was reported at 73.5 per cent in the first quarter of 2015, the highest since records began in 1971 and the unemployment rate fell to 5.5 per cent from 5.6 per cent in the previous quarter. This has filtered through into consumer confidence, with retail sales rising for the past two years and recording strong annual growth of 4.2 per cent in March.
A Structural change
The landscape of the retail sector has hardened in recent years as a strong competitive stance among the major supermarkets continues to take its toll. Expansion plans that were once set out by major supermarkets have been reigned in, as the ongoing price war with discount retailers such as Aldi and Lidl intensifies further. The ‘big four’ have borne the brunt of this on their profit margins and have relinquished market share. As a result, the supermarket retail sub-sector is undergoing a period of consolidation. Earlier this year, Tesco and Morrisons announced the closure of 43 and 23 stores, respectively. With the number of large store openings reduced, this gap will partially be offset by further expansion from discount chains with smaller surface areas, plus growth of smaller convenience stores and store refits, which is expected to pick up in response to changing consumer habits.
Moreover, an increasingly internet-savvy population has driven internet sales growth. According to the latest figures from the ONS, online sales increased by 13.1 per cent in April, compared to a year earlier. In addition, internet retailing represented 11.8 per cent of total retail sales in 2014, rising from a proportion of 4.9 per cent in 2008. Whilst this shift in trend continues to make inroads in the retail sector, bricks-and-mortar retailers are increasingly under pressure from non-store sales. The growing popularity of ‘click and collect’, however, offers high street retailers an opportunity to maintain their competitiveness. The increasing use of internet retailing will also lead to a rise in activity for the logistics and industrial sectors, and consequently, demand for warehouses is anticipated to rise.
In addition to structural evolution, a lack of retail property space and strengthening investor demand will continue to apply upward pressure on rents in prime locations, particularly in London and the South East. Indeed, Central London continues to be supported by overseas investors and a higher tourist footfall than other areas of the country, yet with the availability of prime stock diminishing, investors are likely to show interest in regions beyond the capital.
According to the latest findings from CBRE, rental growth in the first quarter of this year was driven by high street shops in the West Midlands and London, although prime rents in the East Midlands, Wales and the East of England continued to underperform.
So, what does the future look like?
Despite a challenging environment, the outlook for the retail sector appears bright. Retail sales are expected to strengthen in 2015, as growth in real wages continues alongside low inflation and stronger consumer confidence that will support consumer spending. Restructuring will continue across the sector with limited, but large-scale, projects focused on refurbishments and expansions expected in the shopping centres sub-sector. These include the £1 billion Brent Cross redevelopment, the £1 billion extension of Westfield Shepherd’s Bush and the £500 million redevelopment of Oxford’s Westgate which are all expected to start this year. The £1 billion Croydon shopping centre development will also add to growth but has been delayed until 2016.
Headwinds still remain beyond this year, though. An increase in interest rates, which the Construction Products Association expects to occur in 2016, and global economic uncertainty could hinder domestic performance and confidence. Nevertheless, according to the Association, output from the £4.4 billion retail sector is expected to expand at five per cent in both 2015 and 2016.
