11 Jul 2018 3 min read

Let the buyer beware

By Robin Martin

LGIM has long held the view that the UK retail sector is facing some severe headwinds. But that’s not to say there are no opportunities in the sector – it’s just important to be highly selective when making acquisitions.


Reading the headlines over the past several months, you’ll have seen a string of retailers announcing administrations, store closures and profit warnings. Some of this is down to factors that have emerged relatively recently – in particular, import cost inflation following the post-EU referendum fall in the pound. But the problems for UK retail pre-date this; profit margins have come under increasing pressure, dropping by around 30% relative to their pre-global financial crisis levels.

Instant access to price information, while great for consumers, is tough on the sellers

Whilst it isn’t the only factor, it is hard to overstate the role of the internet in the transformation of retail. On the one hand, instant access to price information has forced greater transparency into the market. Although this is great for consumers, it’s tough on the sellers. And the increasing proportion of sales which are fulfilled through home delivery has reduced retailers’ dependence on their store networks. Of all the growth in retail sales in the past decade, just a third has come from sales through stores, whereas two thirds have come via online sales.

Stripping out online sales, retailer sales have barely grown in the past decade

Whilst physical stores still play a major role, many retailers are signaling that their networks will shrink, and increasingly be driven by their ability to support the online sales channel or by showcasing the retailers’ brand. For owners of property, this has led to fragile demand for retail space. In many weaker locations, it has become more difficult to secure tenants and rents have fallen as a result.

We think these issues are an ongoing challenge for UK retailers and therefore the prospects for retail property. But we can’t ignore the role that retail continues to play, both for the market as a whole and in client portfolios. Whilst we are underweight, we still own a lot of retail. The long leases that are still common, often linked to tenants with strong credit ratings, also mean that these assets can play an important part in generating income.

Retail assets can play an important role in generating income

And whilst we’ve presented a simple narrative above, the facts on the ground show wide variation. For example, around 9% of shops owned by institutional investors outside of the South East are not earning any rent at present. By contrast, more than 99% of supermarkets are income-producing. So there are wide disparities in this market that put a great deal of emphasis on stock selection.

Against a complex backdrop, there is a range of factors that we look at when making buy, sell and hold decisions. But here are three that top the list:

  1. Stores that make a profit; you might be surprised to learn that buyers of property often neglect this! We use our network of contacts to identify whether retailers are trading profitably from a particular store
  2. Growing catchment populations; a growing pool of potential customers holds powerful appeal for retailers. We look for locations with strong local economies, jobs growth and housebuilding
  3. ‘Live, work, play’ locations; we aim to hold investments for the long-term and so look for assets which can respond to a changing economy. Locations which fulfill a range of functions, and which can attract demand from different types of occupier, are well placed

Robin Martin

Global Head of Investment Strategy & Research, Real Assets

Rob is Global Head of Investment Strategy and Research for Real Assets, having joined LGP in October 2006. Prior to this, he worked for Hammerson as Head of Research, working closely with the board and senior management team on corporate, sector and asset strategies. Prior to Hammerson, Rob was at CBI for two years as a senior economist, and prior to that, he spent three years in the petroleum industry. Rob has a degree in economics and economic history.

Robin Martin