According to research carried out by Savills, retail yields in the UK in October 2021 remained some of the highest in the commercial market, ranging from 7.5 percent for shopping centres to 4.5 percent for food stores. 

This is reflective of the difficult time bricks and mortar retail has been through over Covid. However, for the first time in a year, the indication is that yields are falling. Anecdotally, retail occupiers say that the market is hardening. So, is now the time to consider investing in retail property?

After several years of rapid change in consumer habits followed by lockdowns and other restrictions, the retail trade has taken some knocks. High streets have been left with gaps. The worst casualties have been in casual dining, concepts that have outlived their relevance or lost their way and businesses that were too highly leveraged to survive.

During lockdown, many businesses adapted by switching to online, take away or delivery of their goods and services. Rents for logistics premises have risen and yields dropped as operators and investors have flocked to them. As a result, the cost differential for operators between bricks and mortar and online has narrowed making bricks and mortar attractive once again.    

In common with many other countries, the UK Government introduced limitations on landlords’ remedies against defaulting tenants including a moratorium on forfeiture (i.e., termination of a lease by the landlord in the event of tenant default). This reduced the number of tenant insolvencies but created problems for landlords.  There were a lot of difficult conversations between landlords, tenants, and lenders. Those who did best were those who collaborated and compromised – something that a few years ago would have been much less common in the market.

The moratorium is due to end in March 2022. A new statutory arbitration process is being created for tenants severely affected by the lockdowns to encourage the settlement of arrears in as fair a manner as possible.

The end of the moratorium could bring new gaps in retail space. But could this ultimately be good news?

The way in which retail space is occupied is changing fast. On 1 September 2020, planning laws changed. The separate use classes for shops, financial and professional (e.g., example estate agencies), restaurants and cafes, offices, clinics, and health centres were merged into to new Class E.  This opened up the possibility of using buildings for any of these purposes – or any combination of them - without the need planning permission for a change of use.  

The planning use changes remove a hurdle to experiential shopping concepts; coffee shops that are also book shops, spaces like the old Debenhams store in Wandsworth that has relaunched as Gravity, a go kart, esports, digital darts etc space with Japanese dining and a cocktail bar. 

To get this right, it is important to have advice from a specialist surveyor, planner, and lawyer.  But most of all, it is critical to pick the right location and the right occupiers. Look at the local demographic in the post Covid world. Where will your footfall come from? Whilst the long-term prospects for city centres are still unclear, local high streets with a good mix of independent shops have come into their own, serving communities who are working from home more than ever before. 

Shorter leases have become the norm. This does not have the same impact on valuation of premises as it did historically. It enables the landlord to refresh their property and its occupiers in order to keep customers interested and revenue and rents flowing in.

Turnover rents have also made a comeback.  For an entrepreneurial landlord, these are a good tool for working with your tenants to share in the good and the bad times.  They help tenants preserve cashflow through periods where trade is restricted in return for paying higher rents when business is good, the amount paid being based on the tenant’s turnover from the property.  This has worked successfully for the Corbin and King restaurant group, which has ultimately paid more rent in total under its turnover arrangements than it would have done under the previous fixed rent regime but nonetheless accepting that this was a good deal for the group in the round.  

Be aware that many new regulations around green issues are on the way. Costs around this should be considered as carbon footprint reduction becomes mandatory, for example with higher thresholds for energy performance and benchmarking of green standards. Lenders are likely to introduce green criteria in their loan terms. Green clauses should be introduced into leases to deal with this. The importance of green issues should not be underestimated when it comes to the reputation of an investor or landlord, not only for its business dealings but for its employees too.

An increasing number of landlords and tenants are devoting resources to making sure they are operating sustainably and sharing this information publicly. For example, Charles Russell Speechlys prepares and shares its Responsible Business Report annually.

The landscape is changing quickly. For those with vision and good advice this could be the perfect opportunity to benefit from the retail revolution.