Retail v Logistics
The loss of retail sales to the online logistics sector has occurred faster than most expected. Our research explores the growth of online distribution warehouses compared to the traditional retail market which has been in free fall, with the loss of several major retailers and key anchor tenants such as BHS, Debenhams & John Lewis.
Retail
Retail is the most interesting sector for the 2023 revaluation, because of the underlying structural changes and resultant impacts on rental values, which were further exacerbated by the Covid-19 pandemic. Since the 2015 valuation date, much of the retail market has been in free fall, with the loss of several major retailers and key anchor tenants such as BHS, Debenhams & John Lewis.
The loss of sales to online retail has occurred faster than most expected. Our research demonstrates that in March 2015, online sales represented 11.7% of all retail transactions, compared to 33.8% in March 2021. This has understandably fallen back since the re-opening of non-essential retail from April 2021 to around 25%. A large proportion of retail is low margin and requires high transaction levels, so it is unsurprising that with such a shift in consumer behaviour the rental market in many areas has been in such decline.
During the 2017 rating list, retailers have had to face high levels of business rates due to the current 2017 rating list being based on the high-water mark of 2015 retail rents. Subsequently, the retail market has largely been in decline, to the extent that by 2019/2020 it was not uncommon for rates payable to exceed rent.
The extent of decline has not been consistent by any means and very much varies dependent on location and pitch. Prime retail across major city or shopping centre locations remains attractive, as do strong tourist cities/towns where footfall has remained largely resilient. Pre Covid-19, there was already a very clear picture developing, but this has been accelerated since March 2020.
Many major prime retailers who deliver through traditional retail stores and online are increasingly looking to consolidate their estates, often deciding on a single retail outlet per major town versus a presence in both the high street and retail park.
The traditionally strong supermarket sector has not been immune. The growth of budget supermarket brands operating on smaller floorplates, at discounted prices and with less product variety, has proved attractive to the consumer.
The major UK supermarket operators have struggled to deliver margin across their largest stores due to over-capacity. In an attempt to resolve the problem, there has been a move to accommodate concessionary outlets, but this has put even greater pressure on the traditional retail market. The growth of online retail means there is simply too much retail space.
Changing retail landscape
As a national picture, there has been a fundamental shift in rental levels across the retail sector. We predict rateable values to fall by 26% between the 2017 and 2023 rating lists. To put this into perspective, this equates to a loss in rateable value of over £5.6 billion. The percentage rateable value loss is largely consistent across all regions, with the South-West being the hardest hit at -33%, followed closely by the North-East.
Inner London was comparatively more resilient falling just 17%. The central London retail market is interesting because, before Covid-19, it was largely immune to the growth of online sales, instead being driven by the strength of the business and tourist markets. However, this has been reversed during Covid-19. Central London as a global destination has been profoundly impacted and the expected delays in the return of international business and tourism will affect rental yields over a longer period.
CHANGES IN RATES LIABILITY BY REGION BETWEEN THE 2017 AND 2023 REVALUATIONS (RETAIL)
Retail Warehousing
Retail Warehousing is showing the largest fall of any sub-sector at over 29%. For several years, the sector has seen falling rents, as higher end retail has moved away to be replaced by discounters, food retailers and alternative uses such as gyms. These occupiers do not attract the same rental premiums. This was clearly apparent before Covid-19, where evidence suggested marked falls of 20-25% in rents nationwide.
Although this trend continued in the initial lockdown of Covid-19, the market stabilised from Summer 2020 as consumers chose to return to more spacious and accessible retail parks, rather than the high street. Notwithstanding, the 2017 rating list was particularly unfair to the retail park sector who had to contend with excessive rate liabilities, kept artificially high due to downwards transition.
ONLINE SHOPPING STATS
Industrial and Logistics
The growth of online retail since 2015 has resulted in major rental growth in the warehouse and logistics market. This has driven the growth of the whole industrial market, moving it from the third largest sector (within the total 2017 rateable value pool) to comfortably first in the 2023 revaluation.
The sector is made up of a myriad of different types of industrial uses, from more traditional industrial/manufacturing where growth has been slower, to the accelerated growth of the distribution warehousing/high bay logistics sub-sector over more recent years.
We estimate the industrial/logistics rateable value pool in England & Wales could rise by as much as £3.3 billion in the new rating list. This would result in the rates liability for the sector increasing by £1.88 billion in 2023/24, up 25% from the previous year. Growth in the rates liability for pure online logistics may help diffuse some of the arguments over the need for an online sales tax, as these businesses will now be paying proportionately more in rates. An online sales tax is, however, a complicated issue and needs to be treated with caution, as so many traditional retailers are multi-channel and thus could be hit twice. With much of the logistics sector low margin, significant increases in rates liability will hit overheads.
To put the growth of distribution warehouses supporting online retail into perspective, Avison Young research demonstrates that since 2015, Amazon alone has acquired 36.5 million sq.ft. of new accommodation or 340 hectares of new distribution warehousing. In 2020 alone, partially in response to Covid-19, Amazon increased their accommodation by over 11 million sq.ft.
As the graphic below demonstrates, the South-East and London have seen the strongest growth, showing a 31% increase in rateable values between the two rating lists.
With supply and land availability more limited in the capital and home counties, the unprecedented demand has driven up rents. In close second place is the Eastern region (30%), followed by the Midlands and Yorkshire & Humber which have seen circa 20% rises, due to their strong locational advantages in the centre of the country.
In contrast, the South-West has demonstrated comparatively limited growth, with demand and supply more constrained due to the region’s location.
Since 2015, Amazon has acquired the equivalent of 476 football pitches. In 2020 alone, they acquired the equivalent of 143 football pitches.
