UK Real Estate Market Outlook 2023
Retail will not be immune to the wider economic headwinds in 2023. Cost saving initiatives are already underway for many occupiers, with the store at the heart of this exercise. Modest expansion is anticipated for well positioned occupiers, and the volume of business casualties is expected to be less severe than during the pandemic. When compared to other sectors, UK retail is expected to be less effected by repricing.
- Given the current economic backdrop and near record lows of consumer confidence, it is anticipated that UK retail sales will decrease next year. Discretionary items and leisure activities will come under the greatest pressure.
- Since the pandemic, online penetrations have declined faster than expected, demonstrating that consumers still value physical retail. This metric appears to have reached a new norm, for the time being.
- Occupier profit margins will be under increasing strain as inflation continues to bite. With logistics costs continuing to soar, many occupiers will seek to direct consumers back into stores to increase efficiencies.
- Modest expansion is anticipated in 2023, for well positioned occupiers in the best locations. Vacancy rates will remain stable, with many having already undertaken portfolio restructuring in the last couple of years.
- Going into 2023, UK retail yields are comparatively higher than other sectors. For that reason, retail will be better protected against current debt costs, and yield movements will be less significant than other sectors.
Sales have been on a steady decline
Consumer confidence is at near historic lows – below the levels reported during the Global Financial Crisis, and the height of the pandemic. In September 2022, the UK retail sales volume index dipped below 2019 levels for the first time since the pandemic. This follows a gradual decline from the peak in April 2021, when restrictions were lifted. Given the current economic backdrop, we expect sales will continue to decrease in 2023. Discretionary products, such as household goods and clothing, are currently the most challenged, and as consumers prioritise their spending, this trend is expected to continue in the year ahead.
Leisure spend will be pressed in the year ahead
Aside from discretionary products when considering where money will be saved, CBRE’s Global Live-Work-Shop Survey found that UK consumers will first cut back on dining out and leisure activities. While the experience sector remains key to long-term leasing plans, to increase resilience in the short-term, asset managers could consider offering flexible leases to occupiers that are relatively more insulated from economic downturn.
As consumers go out less, at-home entertainment products are expected to perform well in the year ahead, with many seeking to make memories and socialise, but in a more cost-effective way.
Figure 13: UK retail sales volume
Source: ONS, CBRE Research
Figure 14: UK online penetrations
Source: ONS, CBRE Research
Online penetrations reach new norm – for now
Online penetrations have come down faster than expected, clearly demonstrating that consumers still value physical retail. Since the start of 2022, penetrations have been on a steady downward trajectory and are now fluctuating at around 26%. Looking ahead to 2023, we expect online penetrations will remain stable, perhaps even falling slightly. According to CBRE’s Global Live-Work-Shop Survey, 71% of UK consumers prefer to shop for essential items in-store. As consumer budgets are tightened, essential products will account for a greater share of overall spend, pushing average penetrations down further.
The store will become even more important
Occupier profit margins will be under increasing strain in the year ahead as inflation continues to bite. One opportunity to save on costs is to rely more heavily on the store portfolio. As logistics costs continue to soar, occupiers are directing consumers back to stores to increase efficiencies. A number of major occupiers are now charging shoppers who return items bought online, with the cost taken from their refund. However, items bought online can still be returned for free in stores. CBRE’s Global Live-Work-Shop Survey demonstrates that this initiative is supported by consumers, with 49% of UK respondents preferring to return their orders in-store (a further 30% remain undecided).
Modest occupier expansion, but vacancy rates to remain stable
Modest store expansion is anticipated for well positioned occupiers, in the best locations in 2023. Moreover, following the recent good news from the Autumn Statement on rates revaluation and the abolition of downwards transitional relief, coupled with many occupiers having already undertaken portfolio restructuring in the last few years, we expect there will be less business casualties than during the pandemic. As such, vacancy rates will remain unwavering, and rents will remain stable in prime locations.
Retail less affected by repricing than other sectors
Going into 2023, UK retail yields are comparatively higher than other sectors. Accordingly, we anticipate retail will be better protected against the current costs of debt, and yield movements will be less significant than other sectors. Year-to-date (YTD) shopping centre yields are stable and remain above shops and retail warehouses, both of which only experienced a small uptick in Q3 2022.
Given the current relativities between the retail sub-sector yields and the bounce back of their performance since the pandemic, we expect the shopping centre come back will continue in 2023. In 2021, the sub-sector accounted for 14% of all retail investment, YTD 2022, it accounts for 20%. The momentum of retail warehouses might slow slightly in the year ahead, now accounting for 55% of all retail investment YTD 2022. However, given the current economic environment, and their focus on grocery and discounter occupiers, we expect maintained investor interest in this sub-sector.
Figure 15: UK prime retail yields
Source: CBRE Research
Figure 16: UK retail investment profile
Source: CBRE Research