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UK Retail Outlook 2019

11/03/2019

The UK Retail & Leisure real estate market: a summary of the key trends, challenges and opportunities in 2019.

UK retail is in a state of flux, driven for the most part by the ongoing shift to online and changes in consumer behaviour. More recently, this has been compounded by rising costs such as business rates and the minimum wage, not to mention Brexit-related uncertainty. 

Disruption is by no means a UK phenomenon and technological advances are disrupting markets globally. For example, retail conditions in some sectors of the US are exceptionally difficult.

That said, clear trends are developing which give us clues as to the future shape of retail real estate. The immense Hudson Yards development in New York is a very successful example of a carefully curated retail and leisure mix.

The structural shift to online in the UK has been underway for over a decade – online sales accounted for just 3% of total retail sales in 2007, against nearly 20% in 2018. This has presented a significant challenge to the traditional retail model and has caused widespread disruption. We expect this disruption to continue, at least in the short term, but in time the sector will balance out to a ‘new state of normal’.

There is likely to be significantly less retail space going forward, but that which remains will have a clear purpose. Moreover, it is key to note that around 80% of all retail sales still occur in physical stores. Success in the future will therefore be based on a balanced approach to physical footprint, digital alignment and logistics execution.

To-date, the combined impact of these trends has been uneven, although, we see a pattern emerging based on shopper missions. These are polarising along the lines of destination, experience-orientated visits; purpose shopping, focused on specific purchases, and community-based convenience trips.

The mainstream department stores are in retreat, hampered by more direct interaction between brands and consumers and a lack of investment, as well as high occupancy costs. The concept is not necessarily obsolete, as evidenced by some very successful high-end operators, but the key to its wider survival almost certainly lies in a much smaller store footprint and a focus on experiential, lifestyle
and wellness formats.

Other areas prone to disruption include high streets in small and medium-sized towns (unless they have a lifestyle offering), as well as secondary shopping centres, many of which will need to be repurposed. There is, however, a distinction between comparison based secondary centres and service/convenience-led schemes which are aligned to their local catchment and play a vital role within the community.

Outlet centres, on the other hand, benefit from an exciting value proposition and, in some cases, a strong leisure offer which enables shoppers to ‘make a day of it’. Retail in Central and Suburban London also carries a very low risk of obsolescence, benefitting from strong demographics and ongoing infrastructure improvements. The same is also true for prime high streets in regional cities.

Traditional retail will continue to play a vital role in the distribution chain, although it will likely form a smaller component of the overall tenant mix on high streets and in shopping centres and retail parks. We should acknowledge that the UK has too much front-end retail space – probably in the region of 25-30% – and that store closures, whether the result of ‘right-sizing’ or retailer insolvency, will continue to be a feature of the retail market for the foreseeable future. In order to achieve this, it is likely that some centres and retail parks will need to be completely redeveloped.

That said, amidst the negative headlines, it would be easy to overlook the opportunities in the current market. Voids left by departing retailers create space for alternative uses and functions, such as events venues, educational facilities, exhibitions, civic and commercial offices, as well as much needed residential space. Private medical facilities and places for health and wellbeing are also on the increase.

Market pressures are forcing occupiers to innovate, and exciting new concepts continue to emerge. The rapid growth of new leisure operators, particularly in city centre locations, is an example of this – in addition to food and beverage, activity and fitness-based formats are increasingly filling gaps left by traditional retailers. Technology is turning the retail sector on its head, although it is not necessarily the enemy of occupiers and investors and should be considered key to enhancing the in-store experience, as well as making property management and marketing more efficient.

As consumers become more demanding and less predictable, flexibility in the built environment is critical to ensuring the continued vitality and viability of our retail and leisure destinations. Whilst central government will need to assist this process by creating the right conditions for regeneration, local planners, investors and occupiers will also need to play a role in this. The headwinds currently facing UK retail are expected to continue at least in the medium term, but once the dust settles, the sector will emerge fitter for purpose, leaner and more dynamic than ever before. 

Download the full report to understand the retail sectors most at risk of disruption and those where significant opportunity lies.

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