King Sturge and PWC see gloomy property outlook

28 January 2009

In depth reports from King Sturge in retail, industrial, residential and investment sectors and from PWC for retail property were published this week.

The King Sturge Property Predictions Property Predictions outlines prospects for the property sector for the next couple of years. The headlines of the report published this week include:

...Rental values will remain level or fall in many markets – occupational demand will be very
thin. It’s a “tenant’s” market. Occupiers have the stronger hand; investors must “manage”
income. It’s the only game in town during 2009.
...There will be very few new developments commencing construction in the next three to five
years.
...There will be even more pressure on BOTH the private and public sectors to use existing
property more efficiently. Refurbishing / re-using existing space will become paramount.
...The “grave dancers” with cash to invest, may have a field day! Forced sales will take
capital values lower in the short term. By 2010 most markets should show total returns
exceeding 5%.
...A two-tier market is emerging. Only well let income producing prime property in the UK will
produce a steady income return, in the region of 7 - 8% by the end of 2009; by then the
worst of the capital fall may have ended.
...Secondary and tertiary un-let property will continue to fall in capital value by MORE THAN
20% until 2010, producing total returns of worse than -10% in 2009, and by then yielding
12% or worse of the Estimated Rental Value. The fear of empty rates taxation is making the
situation far worse than would normally be expected in such a market.
...The Energy-Climate Era has arrived; the USA and EU will be increasingly concerned about
the security of energy, as much as climate change issues. Legislation & public investment
will follow these joint agendas. By 2015 (six years time) over 40% of UK generating capacity
needs to be re-built!
...Short-term some builders are putting in tender prices 5 to 10% below last year, to “buy” new
work. Medium term, higher construction cost inflation (where there is activity) will result in
almost NO privately funded urban regeneration (or Eco-Towns in the UK) for the next 3 – 5
years.
...The “Green Agenda” to meet BREEAM, LEED, and the Code for Sustainable Homes, and
influenced by the compulsory Energy Property Certificates EPCs (across the EU), and
Display Energy Certificates DECs (on all UK public buildings), will push up building costs.

PricewaterhouseCoopers finds more high street rejects
PricewaterhouseCoopers (PwC) research indicates that financially troubled retailers have been closing more than 2 in 5 stores as the high street comes under increased pressure. PwC examined the administration announcements of 22 troubled retailers and found that on average they were proposing to close 43% of their stores. This means that if just 10% of national retailers get into financial difficulty in 2009, then approximately an additional 4,400 stores could come onto the market.

Previously, a similar exercise was carried out in October 2007, May and October 2008 and the numbers increased from 27% to 36% to 38%.

Barry Gilbertson, corporate restructuring partner specialising in real estate at PwC, said: “Trying to calculate the financial effect of these vacancies is also quite complex, but if the average rent paid to lease a high street store or shopping centre unit was to be, say, £160,000 per annum then the rental lost to UK landlords just from these 4,400 stores would be around £700m a year.”

PwC is forecasting that retailers will be able to gain cuts in rents as more companies in the sector hit financial trouble. This morning, the Office for National Statistics reported a decline in UK retail sales of 0.8% in December, the biggest fall since records began in 1986.

“Landlords may even be prepared to waive rent altogether, provided that the tenant stays in occupation and, at least, pays the service charge, insurance and local authority rates,” said Professor Gilbertson.

PwC updated its analysis following a spate of insolvencies of well-known retailers in 2008, listing at least 38 insolvencies, or confidential restructurings by the end of December 2008. There was data for 22 of these retailers, who had previously traded from 3,642 stores. They had to jettison 1,553 stores, equivalent to 43% of the total portfolio.

PwC then extrapolated this research across a range of national retailers to measure the impact of the changing shopping environment.

There are enough shopping centres in the UK development pipeline to open seven centres the size of Bluewater – which is one of the largest in Europe. The retail market has already seen the openings, in 2008, of Liverpool One, Cabot Circus in Bristol and, most recently, Westfield, in West London. Professor Gilbertson said: “When all this new retail space is added to our predicted store closures coming also onto the market, the downward pressure on retail rental levels increases even further. For tenants, this pressure should mean cheaper rents, but for landlords life will be even tougher, as some tenants go out of business and other tenants push hard for lower or deferred rental payments.”