At a time of unprecedented disruption in the U.K. retail sector, it's safe to say that Brexit was the last thing it needed.
Retailers were already struggling to respond to the country's rapid adoption of e-commerce, sluggish consumer spending growth following a deep recession and a crowded marketplace. The uncertainty that the 2016 referendum vote has dumped on the sector — and the economy as a whole — helped push some over the edge.
The number of U.K. stores leased by medium to large retailers that closed in 2018 was the highest recorded since 2012, according to data from the Centre for Retail Research. A total of 2,594 stores were affected by the failure of 43 companies, more than three times the number of stores affected in 2015, the data shows.
"The U.K. retail sector is a bit like someone who has a whole range of different medical complaints," Richard Hyman, an independent retail consultant who has advised some of the country's largest retailers and retail landlords, said in an interview. "It's very hard to know which is causing the most pain. You can't blame it all on Brexit, but Brexit has been a major factor in making consumers nervous and anxious about their prospects and their economic well-being."
Whatever role Brexit has played in U.K. retailers' deteriorating condition, the malaise has inevitably spread to landlords. Faced with falling demand for space as retailers go out of business or retrench, landlords have had to cut rents to attract new tenants or keep existing ones.
The turmoil has hit the share prices of the two largest listed retail-focused landlords in the U.K. hard. Hammerson PLC, whose U.K. portfolio makes up less than half of its total value as of the end of June, has seen its share price fall by 50% since the 2016 vote. The share price of Intu Properties PLC, whose U.K. portfolio makes up 92% of its total value as of the end of June, has plunged 85% over the same period.
This is all before the U.K. has even exited the European Union. Its eventual departure could bring further issues for retailers in terms of international trade terms, supply chains, currency volatility, access to labor, and product standards, according to a report by professional services firm Marsh and McLennan.
John Stevenson, a retail equity analyst at Peel Hunt, said that some of these problems were manageable for the U.K.'s largest retailers. Most will have 12- to 18-month hedges against a Brexit-induced depreciation in sterling, he said, while any problems with supply chains should only be short-term, and are unlikely to have much impact on non-food retailers.
The most important factor for U.K. retailers will be the reaction of consumers to the country finally leaving the EU, and how disposable income will be affected by it, Stevenson added. The political uncertainty generated by Brexit is happening during a particularly inconvenient period for U.K. retailers, he said.
"It's at the worst possible time because we're coming into peak trade [season]," said Stevenson. "It doesn't even need a no-deal Brexit to affect trade. If we have an election or a referendum or any kind of similar political event over the next couple of months, that would have an impact on the retailers in peak trade."
A General Election to break the Brexit impasse in Parliament is widely predicted to happen in the coming months. Footfall usually drops around 5% to 6% in the weeks before a General Election, Stevenson noted.
Any negative impact on retailers from the U.K's eventual departure from the EU is almost certainly going to be passed on to landlords, according to Stevenson. Rent negotiations in the retail sector are already "one-way traffic," he said, and any further hit to retailers' revenues as a result of Brexit "will accelerate that path to lower rents."
"If it led to more players falling over, more insolvencies in the form of Company Voluntary Arrangements or administrations, then rents are going to fall," Stevenson said.
Assets like Hammerson's Brent Cross shopping center in North London should remain
attractive to some investors whatever the Brexit outcome, said Colliers' Tom Edson.
For some invested in U.K. retail property, Brexit is just another reason to reduce exposure to the asset class, said Tom Edson, head of out of town investment at real estate services firm Colliers. U.K. pension funds are looking to down-weight their relatively high retail exposure, particularly to out of town and supermarket assets where they have been active, he said.
Still, U.K. retail assets remain attractive to some investors despite the political uncertainty Brexit has caused, Edson added. North American private equity firms, Middle Eastern and Southeast Asian investors have been among the most active buyers in the market since the 2016 vote, he said.
"Some investors are seeing it as an excellent time to buy because the prices have got cheaper, the exchange rate is extremely favorable, so they can get a double bonus hit if they can buy stuff now and work an appropriate asset management plan," Edson said. Many international investors' faith in the long-term prospects of the U.K. should see retail assets continue to attract interest whatever the Brexit outcome, he added.