Carrying on from my previous views on the short term casualties of a second recessionary slide, the second half of the “Big W”, our attention turns to those in peril in the next 6 to 18 months, or what we see as the medium term.
Firstly Shopping Centres – although arguably these are just consolidated high streets, they are managed in such a way that a small number of units can be vacant without upsetting the overall revenue streams too much. Indeed, a healthy churn rate can be viewed as a positive overall contributor as lower grade brands or low revenue generators can be replaced by more preferential tenants. However, just as a babbling brook at the bottom of the garden is considered a domestic bonus, a raging torrent outside the back door is not! Any significant chain closures, and their resulting distress sales, do nothing for the shopping centre owner and therefore investor. If there is simply not the demand or availability of new tenants to fill the voids – you can do the math!
The other factor in this sub-sector is the continued polarisation in the market, with the further development of the Westfield style mega malls having a demonstrable effect on the smaller regional siblings, where a further decline in footfall is all too self evident.
The widely reported fall in the Nationwide Building Society Consumer Confidence Index last week with its cautionary statement that “…the cost of living continued to rise at more than twice the rate of underlying wage growth, putting pressure on household budgets” was not very encouraging. Even less so, when added to last Friday’s Red Flag Alert report on the number of companies in financial distress from consultants Begbies Traynor, which highlighted a 24% increase in companies experiencing critical levels of financial distress compared with the same period in 2010. Together these seem to point to further uncomfortable times ahead – the unanswered question is though, when will we reach the bottom of the recessionary phase, and when can we look forward to some significant and sustainable economic growth? The answer is certainly not yet clear.
This brings me to the next area which starts to hurt, the Industrial / Distribution market. Arguably as soon as retail takes a nose dive, bearing in mind to maintain the highest levels of efficiency they operate extremely short supply chains these days, the effect on this distribution dominated market should be fairly rapid. However, long leases and clever legal contracts should delay the arrival of any pain, at least into the 6 to 18 month period.
Finally for this piece we turn to the regional office market. If you can afford to take a 10+ year view and have bought wisely, you should be able to sleep easily waiting for the cycle to return. However, if your redemption is earlier than that or you bought prior to the Lehman brothers collapse, significant external factors come into the mix. One prayed for solution would be that packages of government backed financial stimulus, direct and indirect, come to pass in the locality of your investment.
If one looks at the numbers who have aped Norman Tebbit’s rallying cry and got “on their bikes”, the increased levels of economic migrancy arriving in and around Greater London are not just arriving to escape the Euroland crises in the PIIGS and elsewhere including the former Eastern Bloc nations, they are actually starting to arrive by the bus load from other parts of the UK – perhaps now is the time to be regionally afraid.
As we have not perfected the art of teleportation, not least of humans but of office buildings too, a simple slow down or cessation of demand will have a negative affect on rents, capital values and any new development in the regions. The regional economic picture has been trading in challenged times for some years, and sadly has not followed the traditional gleeful “yellow brick road” cycle of London’s comparative prosperity as it has in the past. This is even more applicable to the secondary market, despite increasingly attractive pricing, for painfully obvious reasons. However a glimmer of hope here could be the trend towards conversion of certain office and industrial premises into residential use, but as it seems to be only economically viable on pre-1970s structures, those built in the heyday of the 1980s may well have to fester for the moment.
The final look into the 18 months plus category will be posted shortly.
Read my previous blog on the Short Term effects
