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Michael Neal

Structural headwinds versus cyclical tailwinds in retail real-estate

​With the economic recovery in the UK becoming more entrenched and consumer confidence rising, it is perhaps no surprise to see retail equities performing well in 2013.

​With the economic recovery in the UK becoming more entrenched and consumer confidence rising, it is perhaps no surprise to see retail equities performing well in 2013. The FTSE 350 General Retailers Index is up 38% for the year-to-date (as at 14 November), significantly outperforming the FTSE All-Share Index, which is up 14.5% over the same period. Pricing and valuations are implying growth and retailer confidence is increasing to the extent that several are considering IPOs (Initial Public Offerings) next year including Poundland, Card Factory, DFS and House of Fraser.

Whilst equity valuations can change swiftly to reflect improving sentiment, the impact on real estate, in particular rents receivable, can lag somewhat due to the fixed nature of leasehold contracts. The spate of high profile administrations in 2012 left many vacancies on high streets, shopping centres and retail parks and temporarily distorted supply and demand dynamics between landlord and tenant in all but the very best locations, putting pressure on rents. The structural changes taking place in the retail sector have also had, and will continue to have, their impact. Yet for good quality assets, any voids whether from recent retailer failures or from changing space requirements are filling up fast and there are signs of rental growth returning as occupiers find it more difficult to acquire stores in the locations they prefer. The retail occupier markets have a cyclical tailwind that should be bolstered through IPO activity in 2014 and where landlords can benefit through actively asset managing their portfolios.

Michael Neal

Michael Neal

Head of UK Investment

Michael's biography