The UK retail property market is buoyant: supply is constrained; demand has been boosted by resilient consumer confidence; lease lengths are amongst the longest in Europe and are supported by the excellent financial strength of the leading tenants. European investors are rightly focusing on this attractive investment proposition. However, there are a number of risks which are not widely debated and investors must focus on the type of tenant in occupation. Risk are magnified where investors do not have control over the local retail environment.
Our greatest concern for the UK retail market is the effect that technology is having on the digital delivery of goods and retail services. This concern is discussed below.
Whilst the sale of physical goods is restricted by the complexities of sampling and delivery, the sale of services has no such restrictions and there has been massive growth in on-line sales with significant further growth expected. There are many categories of traditional high street services that are already under threat.
q Financial Services – internet-based financial services are significantly altering the structure of physical space requirements of the industry, leading to many closures. An associated development is the electronic payment of state benefits, which will materially alter the business model of the post office branch network. With many closures already underway, footfall patterns will not only change but be much reduced. Small towns and secondary pitches will be worst affected.
q Insurance Agency – the first major casualty of the rise in on-line insurance sales is Hill House Hammond, which occupied 240 branches and offices. They have acknowledged that the majority of insurance sales are now undertaken on-line, by phone and within supermarkets. We anticipate consolidation of this sector and further closures of secondary stores in secondary locations.
q Travel Agency – on-line agency Ebookers.com saw on-line sales double in 2003 to reach over £500m (e757m) annual sales. British Airways now have more than 50% of their short haul flights booked on-line. This growth in on-line sales impacts upon the revenues earned by traditional travel agencies and intermediaries and will drastically reduce both the profitability and need for traditional shops.
q Residential Estate Agency – whilst this sector has not been affected to date we raise the prospect that it will. UK house search site Vebra.com is one of the most frequented of any UK websites and it seems inevitable that the further transfer of property information on-line is probable, again reducing the long-term need for ‘shop windows’. In the US, so concerned is one of the leading realtors (Cendant) that they have tried to legally restrict access of information from realtors to on-line agents.
q Books/Music/Video – whilst the greatest perceived threat in the early days of the internet, book sales increased as access to them was made easier. However, the threat to music retailing is massive. The prospect of electronically delivered music is now significant with the acceptance of the Napster-style digital download, indeed physical sales of UK singles dropped 30% in the last year alone. Video, whilst technically more demanding to deliver, is an area to monitor but is also likely to be detrimentally affected as the technology improves.
In conclusion, diversion of services from the high street is well underway, and whilst this may not lead to an immediate exodus from high street units, the rent bill in these locations will come under greater scrutiny. In other words, if the ‘shop window’ is no longer a physical presence then the occupiers’ willingness to pay retail rents will reduce and property investment performance will suffer.
The threat to major and prime retail locations is harder to gauge. Whilst occupier impact will be more limited, investors may incorrectly perceive the removal of demand from smaller centres to be contagious for all locations. We do not foresee that retail warehousing will suffer to the same degree as the goods sold are not easily diverted and still favour this sub-sector as having the highest prospective returns.
Despite the concerns raised above, we still see UK retail rental growth being stronger than for offices or industrial over the next five years, but the range in prospective returns could widen
considerably between the best and worst locations.
Andrew Allen is director of research at Savills Fund Management in London

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