The UK High Street: What's In Store?

Ongoing economic, technological and socio-demographic shifts have strained bricks-and-mortar retailers for some time now, but pressure was at its worst in years in 2018 and many people now question how relevant the British High Street will be in the near future.

While the UK retail property sector has long been slowing since 2008, last year was particularly bruising with a raft of major chains undergoing Company Voluntary Arrangements (CVAs) and entering administration. Several others collapsed altogether, including the legacy department store chain House of Fraser and the music & entertainment retailer HMV, which were both rescued at the eleventh hour by investors. The UK-based Centre for Retail Research estimates that a total of 43 retail companies failed in 2018, affecting 2,594 stores and 46,014 employees. In the first one hundred days of 2018 alone, eighteen large and medium-sized retail companies collapsed into administration involving almost as many stores and more jobs (13,500) than in the whole of 2017. More recent reports show that the list for receivership filings in 2019 is already growing.

The causes of this crisis are not surprising – lower consumer spending amidst Brexit uncertainties and consequential price discounting has led to reduced retailer profit margins and loss of market share. On top of this are rising occupancy costs (caused by recent hikes in business rates) as well as increased labour costs (e.g. as a result of an increase in the national living wage). Then, last but not least, is fierce competition from discounters and online/mobile retailing, which now accounts for 18% of total retail sales in the UK.

Retailers, therefore, have been forced to reduce their store portfolios and consolidate into top locations (where demand is strongest). Nevertheless, while we continue to see a polarisation between prime and secondary markets, recent market data shows that even top-tier properties are suffering. MSCI has reported that UK retail capital values in the MSCI UK Quarterly Property Index fell by 5.3% year-on-year on average in December 2018, with rental values dropping by 2.2% over the same period. In Central London, rents on standard shops experienced positive growth up until the third quarter, while the rest of the UK felt the pain all year.

The downturn in retail property has spread across the sector as a whole. In fact, average national retail rents are forecast to continue falling over the next five years, which, when combined with yield rises, is expected to lead to further significant capital value declines. Virtually every city and town is expected to see further rental decreases due to deteriorating retail demand and general oversupply of space, which is estimated to reach around 20-30% of the total retail stock in the UK. Secondary and tertiary retail centres will see the sharpest declines, but even prime locations are expected to see some falls in rents and capital values this year and beyond.

It is no wonder that investor sentiment towards the retail sector has dampened. This has been reflected in pricing and valuations in the listed retail sector where even flagship mall REITS such as Hammerson and Intu have recently been trading at discounts to their NAVs of 50-60%. Although the extent of the discounts may be overdone (which partly reflects weakened sentiment towards the wider equities markets), it suggests further downgrades to direct retail property values are imminent, which is likely to lead to increasing vacancy rates and potential obsolescence of some stock. This inevitably will have a serious impact on the structure and function of our high streets and town centres. If they are to remain relevant and successful in the future, they will need to have a purpose beyond retail; for example, socialising, leisure, eating and drinking, as well as entertainment, education and even sleep. 

The High Street’s next new model

Health and wellbeing facilities have become very important as a result of increasing demand from younger generations but the elderly also will drive new high street projects since they often have complex housing, social care and healthcare needs that are not adequately met by the public sector. As such, the future structure of our high streets and town centres could include health clubs, gyms and yoga studios, as well as senior living facilities and healthcare.

Another changing force is the Fourth Industrial Revolution – it is already disrupting traditional shopping and business models and blurring the boundaries between the online and offline worlds.  For example, it is creating increased demand for click & collect facilities, as well as enhanced virtual reality (VR) and other digital experiences in-store. This, in turn, is leading to new urban logistics centres close to where customers live and work for quicker fulfilment of online deliveries.

Considering this evolving supply chain, we are starting to see a transformation of our high streets and town centres into sustainable, mixed-used communities with technologically-enabled hubs. These increase the social and economic value of the high street and many recommendations have been made over the last five years by a range of influential public and private sector organisations and relevant stake-holders.  Last year’s Grimsey Review 2 report, “It’s time to reshape our town centres”, discussed how we are now at a tipping point of enormous social and economic change enabled by technological disruption. It explained that our high streets and town centres need to be recalibrated so that they are resilient to change and provided twenty-five recommendations for towns to develop plans that are business-like and focused on transforming the place into a complete community hub.

Nonetheless, as the report highlights, there are several barriers to this vision. These range from a need to overhaul the outdated business rates system and update the planning system to make it more flexible and responsive to changes in market conditions to allowing for easier change of use and the fragmented ownership of high streets with retail tenants on long leases making large-scale redevelopment difficult and time-consuming. There is also the bureaucracy caused by complex layers of local government and financing constraints caused by local authorities with large budget deficits (due to a decade of austerity measures).

Although there is no easy way of overcoming these, more needs to be done. The Housing, Communities and Local Government Committee of the UK Parliament recently completed a six-month review of the significant changes and challenges affecting the high street and town centres leading to recommendations published in their ‘High streets and town centres in 2030’ report. They recommended that large-scale structural change is required but that this required intervention led by the local authority. Recognising the financial pressures faced by local authorities, it also recommended central government funding and significant private investment. The UK government has actually provided a £675 million ‘Future High Streets Fund’ aimed at kick-starting this intervention, but the Committee said that more funding needs to be provided and suggested using revenue generated from reforming business taxation. This reform would include reducing rates on business rates for retailers in high streets and town centres as well as introducing an online sales tax and ‘green tax’ on online deliveries and packaging to level the playing field for physical retailers compared to pure online retailers. It also proposed a comprehensive review of the planning system related to the high street and creating a ‘Future High Streets Task Force’.

There are several examples of high streets and town centres, however, which have already undergone major successful urban regeneration, and there are others, which have seen much smaller-scale development projects and conversions from retail units to other uses such as housing, leisure and offices. For example, Bracknell town centre in the South East was successfully transformed in 2017 into the new ‘Lexicon Bracknell’, a major retail, social and cultural destination achieved through a joint venture between Bracknell Forest Council and the private sector with an investment of over £240 million.

On a smaller scale, some of our high streets have been transformed into dynamic retail and mixed-use communities where empty shop units have been converted to temporary pop-up shops, fresh food markets, flexible co-working spaces or digital tech hubs. Barclays Bank, through its Eagle Labs platform, has developed a network of nationwide tech and creative labs in former bank branches on high streets to create a mixture of services, including collaborative co-working space, structured mentoring schemes, training and support to local start-up entrepreneurs on new and emerging technologies and tech innovation such as AI, 3D printing and coding. An initiative such as this provides local employment opportunities and acts as a catalyst in the local community to inject new life and creative energy into otherwise declining high streets.

Despite these initiatives, many of our high streets and town centres are still in urgent need of large-scale structural change. A more holistic, collaborative approach involving investment, innovation, leadership and strategic vision from public and private sector organisations is required if we are to save and transform them to have a thriving future. As there is no ‘one-size fits all’ approach for every type of high street in a complex national and regional hierarchy of towns and cities, well-researched, tailored solutions are required. These solutions need to be based on detailed analysis of the local physical and dynamic digital catchment area demographics, as well as spending, travelling and workforce data (at the most granular level). This is now achievable because of rapid advancements in computer processing power, data science and analytics.

Over the next decade consumers are still likely to want to shop in physical stores with complementary browsing and purchasing online, so high street retail will still have its place and businesses will still want to have a physical store presence, not only for in-store purchases and browsing, but also for raising brand awareness, managing online order returns and for click and collect purposes. However, their offer will need to be a highly personalised, memorable experience as well as convenient for consumers. Otherwise, further decline is inevitable.

Joanna is a committee member of the Society of Property Researchers (SPR), which is an organisation of researchers from across the property industry in the UK, and she recently co-organised a series of retail seminars on various aspects of the retail sector for members.

Important information

The value of investments may fall as well as rise and investors may not get back the amount invested.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments.

CLI01381 Expiry 30/04/2019

Joanna Turner

Joanna Turner

Head of Property Research

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