Consumer confidence took a slight downward turn in the run-up to Christmas. This was probably due to a mix of bearish headlines about how tough Christmas was going to be for retailers, the bad weather, and a degree of realism about real earnings growth.

British consumers should be feeling more positive with unemployment down to 7.1%, inflation expectations down to 2.4%, and base rates likely to remain low for the foreseeable future. However, real earnings growth remains stubbornly negative, with the latest data from the ONS showing that average weekly earnings are rising at 0.9% per annum, well behind the latest CPI figure of 2.0%.

The coalition's argument that real earnings growth is rising for "most" people is a touch optimistic, and we believe that it wont be until 2015 that most people are actually feeling that their real wage has risen year-on-year (let alone corrected the losses of the last six years.)

However, 2014 will be a year of improving optimism and declining savings ratios. There will be more money spent on the nation's high streets, shopping centres (and computers), but confidence will remain fragile, and the recovery will be more of a choppy ripple outwards from London than a ubiquitous national bounceback.

The retail occupational market

The fourth quarter of 2013 saw a further pick-up in retailer confidence and requirements, albeit tempered by a lack of suitable stock.

This positivity continued into the crucial Christmas trading period (as we predicted in our last bulletin), with an average reported increase in like-for-like sales of 4.8%. While LFL sales data is a fairly blunt metric, it does indicate some degree of year-on-year improvement in sales. Furthermore, more retailers this year mentioned margins in the context of "maintaining" or "improving" them, which is probably a rather more significant change on 2012-13.

Our key takeaways from this Christmas and New Year are that there were fewer negative trading statements than last year; dramatically fewer administrations on the quarter day; and some hints that the housing market recovery may be starting to feed through into parts of the retail market. On the other side of the coin, the continued strong LFL growth of Dominos Pizza is an indication that consumers might still be in a relatively cautious frame of mind when it comes to leisure spend.

We expect 2014 to see a continuation of the trends that were seen in retailing in 2013, with a highly fragmented market between prime locations (central London & tier one town and cities), secondary markets (where rents are correcting downwards to a sensible floor), and tertiary markets where structural change is still redrawing the local retail offer.

The key story in the central London retail market will be the challenge of creating voids. Not only will vacancy rates remain virtually zero, but it will be hard to get retailers out of their stores. We expect to see a pick-up in reverse premiums as new entrants try and create opportunities for themselves.

Where voids do occur in the prime markets, they will be welcomed by landlords as an opportunity to raise rents. For example, it is rumoured that the new tenant for the Gilly Hicks unit on Regent Street is paying £200,000 more than the outgoing tenant.

Prime central London's strength will benefit fringe locations, with strong retailer demand and growth expected in fringe markets such as Brompton Cross, Kings Road, and Piccadilly. It will also benefit prime regional and sub-regional centres, as new entrants to UK retailing grow in confidence and expand beyond their central London base. We expect to see further national acquisitions in 2014 by the US retailers in particular. Names to watch in this space will be American Eagle, J Crew, Anthropologie, Pottery Barn, West Elm and Victoria's Secret.

Elsewhere, the prospects will be mixed with retailer demand returning to locations where the demographics are right and the rents have rebased to a more affordable level.

Shopping centre investment

The shopping centre investment market witnessed a surge in activity in 2013. A total of 84 centres were transacted representing a capital value of £4.58 billion. This was a marked increase on the £2.7 billion traded in 2012. Interestingly, average initial yields in Q4 2013 were 7.6% down from 8.94% in Q4 2012, reflecting the weight of capital attracted to the sector.

Notable deals in Q4 2014 included:

■ Elephant & Castle Shopping Centre in London. Acquired by Delancey/ APG for £80 million. This reflected a NIY of 4.25%.

■ King Edward Court, Windsor acquired by Scottish Widows for £102 million. This reflected a NIY of 5.6%.

■ Royal Exchange, London was sold to Oxford Properties for £83.5 million. This reflects a NIY of 4%.

■ Queensgate Shopping Centre, Peterborough acquired by Invesco for £202 million. This reflected a NIY of 6%.

■ Centre MK, Milton Keynes. A 50% stake was acquired by Henderson/ Australia-Super Fund for £260 million. This reflected a NIY of 5.4%.

The shopping centre market has witnessed new entrants into each of the subsectors on a monthly basis. This is especially true at the prime/ super prime end, where we predict further yield hardening due to the tight supply and weight of capital as markets polarise to prime/ dominant assets. Such is the scarcity of stock at the prime end, we are now seeing the REITS and Sovereign Wealth Funds looking to acquire 50% passive stakes in joint venture which 12 months ago would not have been considered.

There are currently 18 shopping centres under offer accounting for £1.35 billion, 13 in the market accounting for £1.7 billion and approximately 22 shopping centres being prepared for sale.

As Savills predicted 18 months ago the last 12 months has seen significant interest in strong town centre dominant centres with yields coming in c. 50-70 bps over the year. This area of the sector has been dominated by the opportunity funds and we expect this trend to continue through 2014.

The secondary and tertiary markets remain difficult with pricing remaining at a significant discount to prime and for good reason. We would anticipate some inward yield shift through the year but only in the stronger secondary assets. Lease expiries, retailer portfolio rationalisations and the polarisation of markets will continue to create challenges in this subsector.

The debt markets remain extremely active with competitive terms from a broad range of lenders, albeit this is predominantly focussed on the super prime, prime and town centre dominant ends of the spectrum. Loan to values are typically in the order of 65%-70%, with margins of 200- 225bps for these assets.

The majority of the lenders are becoming more and more focussed on a tighter group of “core borrowers”. There is a much reduced pool of lenders for the secondary / tertiary assets and importantly with more stringent terms. Loan to values would typically be in the order of 50% with margins in the order of 350-400 bps.

One note of caution, on the horizon is the creeping rise in swap rates, which are beginning to factor in future interest rate rises. The impact on the markets, yields and types of buyers is yet to be seen.

Our prediction is that as swap rates creep up, margins will come under pressure, yields will likely harden and the opportunity funds/private companies will be priced out of many situations leaving an institutionally dominated market in 2015.

Taken from
UK Shopping Centre and High Street Bulletin Q4 2013