Retail: adapting to change



Ainslie McLennan, Co-Manager of the Janus Henderson UK Property PAIF, examines the structural changes taking place within retail and the impact on physical bricks and mortar stores.

The UK retail sector saw falling investor sentiment and negative headlines throughout the course of 2018, driven by economic and political uncertainty, a trend which is likely to continue in 2019.

Adapting to changing consumer behaviour

Our long-held view has been that the retail sector, particularly traditional retailers and high street assets, would come under pressure.

Structural changes continue to see a shift away from the high street towards online sales. Back in January 2008 internet sales accounted for 5% of all UK retail sales but the growth in ecommerce has led to this figure rising to 18% according to the Office for National Statistics as at August 2018. Some retail-based businesses have responded well to managing this change by engaging with customers and changing the experiences and services that they offer. Others have struggled and this has led to an increase in tenant bankruptcies and company voluntary arrangements (where new terms are agreed with creditors to help them to continue to trade).

The issue of polarisation continues with economically-resilient retail locations getting stronger and weak areas no longer viable as retail destinations. Therefore, the identification of prime locations, positive demographics and due diligence on occupiers remain key. For a number of years we have been diversifying away from traditional areas of the market as we seek to maintain an appropriate, broad mix of assets that we believe to be best suited to the conditions ahead.

A physical presence

While the wider retail industry has been impacted by structural declines, footfall in retail parks with warehouse style assets has been the most resilient amongst major retail formats in recent years, as shown in the chart below. This trend is not uniform across all assets, but go past any well-located retail warehouse park and it is clear that many of these assets have benefited from having a convenience offering and the growth in ‘click and collect’, which allows savvy retailers to remain located in stores that are internet compatible.

Footfall in out-of-town supermarkets has also benefited from the convenience and accessibility for shoppers. Food remains a relatively defensive sector, with many supermarket chains having experienced robust in-store sales growth during a period when the clothing and footwear segment of the market saw sluggish growth.There are, however, challenges facing supermarkets. The ongoing price war between the ‘big four’ and the discounters (such as Aldi and Lidl) is likely to exert downward pressure on inflation, thus hitting nominal sales growth.

UK store footfall growth (% change year-on-year)

Source: BRC, Q3 2018, figures are calculated using 3-month moving average data.

Survival through evolution

Retail will survive but not as we know it. Successful town and city locations are likely to be multi-use, combining retail with residential and leisure facilities, such as gyms, cinemas and restaurants, which factor in wellbeing and sustainability. Fewer shops in the future will force retailers and stores to be far more engaging and interactive to attract consumers and personalise their shopping experience. Landlords will need to take account of these requirements to attract the next generation of retailers.

Artificial intelligence (AI) is one example of retailers adding value through a physical presence. Clothing retailers may soon be embracing AI-based technology such as installing 3D virtual fitting rooms with touch screen digital mirrors that allow customers to ‘try on’ different colours and styles without changing garments.

Source: Getty Images

AI is also likely be used in future to increase efficiency and space by tracking customer behaviour in shops by analysing aisles or promotions that are attracting shoppers and what is not. Meanwhile, Amazon, the e-commerce specialist, plans to take market disruption full circle by expanding into physical grocery retailing in key inner city locations with cashless and cashier-free free stores. Motion-tracking AI would be used to record and charge customers’ accounts for what they have taken from the store.Technology is key to the future or failure of retail and companies that are successful in tomorrow’s world are likely to be the most adaptable to change.

Purley Way, Croydon, is a large retail warehouse park in South London and an example of how engagement with retailers and local authorities can add significant value for investors:

  • The portfolio owns approximately nine acres of land adjoining Purley Way, with retail units let to John Lewis and Currys.
  • Planning application submitted to develop 35,000 square feet of retail warehousing on a vacant site situated between the John Lewis and Currys units.
  • Proposed development 90% pre-let ahead of securing planning permission.
  • Inflation-linked lease agreements signed with Aldi (25 years) and Smyths Toys (15 years) to occupy the completed development.
  • Additional 2,500 square feet of development for which planning permission is expected to be granted in the first half of 2019.
  • Significant valuation gain from an otherwise redundant portion of the site providing further portfolio diversification.

Source: Nuveen Real Estate, 31 December 2018.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.

Important information

Please read the following important information regarding funds related to this article.

Janus Henderson UK Property PAIF

This document is intended solely for the use of professionals and is not for general public distribution.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Specific risks

  • This Fund is dual priced. The price at which you buy shares/units in the fund will incorporate the transaction costs incurred in buying physical properties. When you sell shares/units in the Fund the price you sell at incorporates the transaction costs incurred in selling physical properties. The difference between these prices is called the ‘spread'. This spread is currently c. 5% and reflects the high transaction costs of buying and selling commercial property. Typically the buying price of an individual commercial property can be 7-8% higher than the selling price. The spread of the Fund is not fixed and may vary over time depending on the composition of the Fund.
  • Some or all of the Annual Management Charge and other costs of the Fund may be taken from capital, which may erode capital or reduce potential for capital growth.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund contains assets which may be hard to value or sell at the time and price intended. In particular, property investments may take a considerable time to sell. When many investors want to sell their shares, the Fund may have to delay processing requests so that certain assets or properties can be sold first. This is known as deferring redemptions.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Valuations are determined by independent property experts. The valuation of property is generally a matter of valuer's opinion. The amount raised when a property is sold may be less than the valuation.
  • Tenants in the Fund's properties may become unable to pay their rent. As a result, the Fund's income may be impacted and further costs incurred.

Risk rating


Important message