Move to internet retailing has implications for real estate and equity investors
Internet retailing is entering a new phase of growth and, as a result, many formerly store-based retailers are being forced to adapt business models and property requirements.
Aviva Investors has examined the changing dynamics, potential implications and new opportunities the internet brings for real estate and equity investors.
David Skinner, chief investment officer, real estate says: “The growth of internet shopping has been a key issue for commercial property investors for years but the pace and scale of change has been greater than many had anticipated. There are a number of consequences and risks real estate investors need to consider, such as the fact that retailers will require less space, income risks may rise for certain properties and landlords will have to become more flexible with regards to leases.”
Retailers will require less space. A recent BCSC report estimated that around 20 per cent of current retail space in the UK will become surplus to requirements as a direct result of multichannel retailing. In many mature markets, internet retailing will be a force behind lower aggregate floorspace demand, which implies a depressive effect on rental growth. Aviva Investors’ research suggests average real rental value growth will fall to between zero per cent and minus one per cent p.a. throughout the 2010s and 2020s.
Income risks will rise for certain property types and occupiers, leading to higher yields and required rates of return. That said, demand for high volume and convenience locations are expected to continue. Reassuringly, major urban centres and small local convenience venues should experience sustained or growing occupier demand.
Landlord and tenant relationships will become more flexible. Relationships will come under increasing pressure as legacy retailers rebalance their property portfolios while temporary store formats become more common. There will be increasing demand for shorter and more flexible leases. Landlords must seek to understand the needs of occupiers and consumers as they adapt to a new retail environment.
Skinner says: “Investors should constantly monitor their existing portfolios for exposure to the risks identified above and consider the impacts of online retailing as one of a number shifting variables. Having said that, we believe the internet’s power as a marketing tool also offers a source of great potential for companies that embrace multiple sales channels. This could indeed lead to new sources of occupier demand for commercial property and mitigate some of the income risks the internet poses for real estate investors.
“Companies like Amazon, Tesco and the Royal Mail for example have all been increasing their distribution floorspace in response to growth in online retailing. Other ‘pure play’ online retailers allow customers to collect or return items using lockers or local convenience stores, which in turn raises footfall at those physical locations.”
Trevor Green, head of institutional equities, says: “Today, many of our high street retailers are struggling with property portfolios that are a legacy from a different era. Thomas Cook, for example, recently announced plans for more store closures, a move it considers a necessary step to meet customers’ changing travel needs. Investors will welcome this decisive action. Some of the highest-rated retailers in the UK stock market today - such as ASOS - are those with little or no high street presence.
"There are, however, moves to try and reverse this trend. Mary Portas, the government’s retail tsar, previously championed the high street by urging the government to restrict new out-of-town retail developments. It responded with a watered-down ‘town centre first’ policy which, given the number of shop closures already this year, has been a failure. My worry is that even Mary Portas’s good intentions can only slow, not reverse, the decline of the town centre.
“So as an equity investor, I look for companies with a successful, multi-channel strategy. For example, Justin King, CEO of J Sainsbury, has made great progress from his focus on building what he calls ‘complementary channels and services’ with the company's supermarkets, convenience stores and online grocery offerings all remaining highly having credible. According to the supermarket chain, the magic starts to happen when customers begin to shop from all three channels. At such times it says, total spend increases by over two times.”
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