Rental growth for the retail sector is expected to reach just 1.5% pa over the 2013 to 2017 forecast horizon, according to the latest Real Estate Investment Forecast from Colliers International. Outside Central London, Colliers International expects standard shop rents to fall by a further 2% in 2013 before stabilising in 2014.

Dr Walter Boettcher, Director of Research and Forecasting at Colliers International comments on the findings for the retail occupier and investment markets:

“Some pessimistic forecasts suggest that positive rental growth is not expected until 2016 in the retail sector. Margins for shop operators continue to be squeezed by non-store sales, whilst food and luxury goods retailers are perhaps alone in being able to pass on increased costs. Given this background, rental growth (ex-London) remains elusive.”

Retail shop operators have continued to suffer in Q1 2013, resulting from thin margins, as turnover relies on discounting. The report reveals that shop price inflation fell to 0.6% yoy in January before a modest recovery in February and March, to attract consumers whose real earnings have been contracting since 2008.

Reports show that 54 companies failed in 2012 affecting 3,951 stores and 48,142 employees, the worst result since 2008. So far in 2013, another 16 companies have failed, affecting 1,676 stores; this is over a quarter of the 2012 totals already.

Despite this weak rental profile, yields are expected to remain stable as overseas investors push Central London yields down by another 10 bps in 2013. Total return to retail property is forecast to rise substantially from 0.9% in 2012 to 7.4% in 2013, with a peak expected in 2014 of 8.8% as capital values improve and yields begin to move in.

“We can expect shopping centres to lead as pricing begins to recover from the substantial write-downs of the last few years, with both shopping centres and retail warehouses likely to see modest yield compression as capital value falls come to an end,” Boettcher concluded.