By Kate Williams

It came as a welcome relief to many when non-essential retail shops were allowed to reopen last month, following almost three months of mandatory closures due to the Covid-19 pandemic. However, in the wake of lockdown restrictions easing we are beginning to witness the effects of the closures, as the latest retailer, John Lewis announces its plan to permanently close eight stores. Businesses are being forced to look at their trading performance and carefully plan for the upcoming months as the prospect of a second wave or local lockdown has become a real possibility.

In recent years, the retail sector has faced well documented challenges due to the growth of e-commerce, which has simply accelerated during the pandemic as the government advice continues to promote social distancing. The high street has been hit hard by this, but despite these challenges there are still some ‘winners’ to be found.

Multi-use centres and urban discount units have seen an increase in footfall and appear to have weathered the pandemic better. These trends are driven by changing demographics and consumer habits, whereby destination shopping with an increased mix of leisure and residential has become the preferred option.

The concept of “placemaking” to shape surroundings to maximise shared value has become more prominent in the planning process and high street developers need to be willing to consider this. In the short term, high streets need to be reinvented to ensure the space is appropriate to social distancing rules and to meet the needs of the public, such as pedestrianising main streets. Moreover, the high street should take advantage of consumer preferences to shop locally, owing to reduced capacity on public transport and the reluctance to go to busy city centres.

As for a more permanent solution, the prevailing consensus suggests high streets must utilise the space to include a greater variety of residential and leisure in order to draw in consumers and survive in a competitive market.  

From an investment perspective real estate retail has traditionally generated steady cash flow in a lower risk setting than other sources of yield, but the long recognised stresses underlying this market have been significantly exacerbated during the pandemic leading to reduced rental incomes following tenant’s requests for rent holidays and deliberate non-payment.

Lenders are having to reassess their risk appetites for financing real estate investments and we can expect to see a re-focusing of loan portfolios to match consumer demand. The full impact to asset value of retail spaces is still to be seen, but financial covenants and related default triggers are being monitored very closely across the market and lenders are braced for a new round of provisions.