Should property investors abandon the High Street? Two areas Kames backs to thrive

Property investors need not abandon the UK High Street despite the wave of failures sweeping through the sector, with some areas continuing to offer opportunities, according to Richard Peacock at Kames Capital.
So far this year a number of household names have been forced to take drastic action and close stores amid increasing competition from online retailers with Carpetright, Mothercare and House of Fraser all embarking on significant restructures.
However, despite the clear issues facing the sector, Peacock, manager of the £687m Kames Property Income fund, said there remained opportunities in the retail sector.
“The challenges facing the retail market are well documented and include changing shopping habits, the rise of internet retailing, an oversupply of retail accommodation in many city centres, and imported inflation increasing costs for retailers,” says Peacock.
“As a result, store-based retail is declining and we have seen several high-profile failures on the High Street and on out-of-town retail schemes. However, there is a future to retail on the high street but it will be different.”
Peacock highlighted two categories where bricks and mortar retailing can still thrive. He said retailers that can offer families entertainment and food alongside shopping – creating an all-day experience – will be able to see off the threat caused by cut-price online rivals.
“One area we favour is a leisure experience, with shops becoming platforms for interaction and engagement. This will be focused around the major towns, cities and dominant shopping centres which can position themselves as high-engagement retail destinations incorporating a leisure offer and food and drink provision,” he said.
Meanwhile, conveniently-situated supermarkets that sell everyday staples will also be winners, says Peacock, as will banks, coffee shops and mobile phone operators that offer things people need, such as fresh produce and accessible services.
“The other winner will be convenience-based retail focused on the traditional grocers (Tesco, Sainsbury’s, Asda, Morrisons), discounters (Lidl, Aldi) and value retailers (B&M, Home Bargains) who offer fresh produce, urgent goods or accessible services for a local population such as opticians, banks, coffee shops and mobile phone operators,” he said.
“These will be most successful where they offer hyper-convenience through proximity to transport nodes in densely populated catchment areas. We expect the larger format superstores will need to be downsized as part of the shift towards convenience.”
Nonetheless, he said at a national level, retail rents will fall, leaving many assets over-rented and overvalued, and the fund is underweight the sector, when it comes to exposure to retail, with 29.2% in retail versus 35.4% for the wider sector^[1].
“The impact of the changing environment is not fully reflected in market pricing or asset valuations today. Going forward, the sector will underperform the market with some assets seeing significant valuation falls.
“Therefore, while fund has a mix of retailers, including prime assets in retail destinations such as Buchanan Street in Glasgow, as well as convenience-led shops in wealthy London commuter towns, such as Stevenage and Crawley, we do not hold any shopping centres, department store tenants, or large format supermarkets.”
He added having launched just four years ago, the Kames Property Income fund had been built at a time when these forces had clearly been reshaping the retail landscape, with the portfolio therefore focused on locations and occupiers that are aligned with the themes that the team expects to differentiate successful or unsuccessful retail locations.
“The portfolio is better placed than many of the fund’s competitors who are encumbered with legacy portfolios featuring large, obsolete retail assets”, he said.
“It is also worth noting that the market volatility and sentiment around retail could present investment opportunities as herd mentality in capital markets misprices good quality retail assets. In chaos there is opportunity but this will be selective and with a clear understanding of the risks inherent in the sector.
^[1] According to the fund’s May 2018 IPD Benchmark Report the Kames Property Income fund had direct portfolio exposure to retail (including retail warehousing) of 29.2% against a benchmark weighting of 35.4%.