There is every indication that 2015 will be a defining year for the retail property sector.

James Watson

Many retailers and investors find themselves at a crossroads and face tough decisions about which direction to take.

Occupational outlook

First the good news: barring any major economic wobble due to the election result, the economy will continue to grow at 2.5% to 3%, inflation will remain very low and household income will rise. The collapse of oil prices will have a positive impact in the UK (outside of Aberdeen).

After a post-recession lull, the shopping centre conveyor belt will speed up and we will see successful development leasing of schemes in locations including Oxford, Edinburgh, Glasgow, Birmingham, Chelmsford, and Winchester.

However, against an improving backdrop of consumer spending, the crossroads for many retailers is whether they will return to expanding their physical store network or stick to the more modest levels of representation dictated by the internet. Price is the top driver of choice and loyalty is being challenged. Conversely, we have also seen the initial migration of online retailers (Amazon, Made.com) onto the high street and this will continue.

The greatest upheaval will continue to be in the foodstore sector. There will be store closures and maybe even instances of the ‘big four’ assigning to each other — unthinkable 12 months ago. Large stores with low-income catchments look vulnerable.

We’ve had to live with over-rent on the high street and in shopping centres for years, but in 2015 we will see it properly manifest itself in retail warehousing. It’s interesting to see that 47% of LondonMetric’s property portfolio is in retail logistics.

Investment: the alternative view

Continued demand from institutions and overseas buyers for healthy retail, plus improving loan-to-value ratios will lead to another good year for the investment market. REITs and funds will take this opportunity to reposition their portfolios by selling ex-growth assets to overseas investors. We should expect significant sales of secondary retail parks and shopping centres.

There will be no let up of US money, in particular, for these assets, despite some early movers finding things more difficult than they anticipated. Our advice for investors in multi-let retail continues to be to buy prime.

Secondary is over-bought and looks risky.

The reduction in demand for secondary foodstore assets will continue. Events such as the non-opening of Tesco Chatteris have had a major effect on investor confidence, but we think prime stores will hold up well. This is likely to have a positive knock-on effect on alternative sectors.

Eastern promise

The retail, occupational and investment landscape has changed and we must consider which road we are going to take.

London will continue to be a market apart, but for real performance look to east London. With a growing professional population, improving infrastructure and limited new supply, Dalston, Southwark and New Cross are where it’s at. Look at their predecessors Shoreditch and Brixton.

My top tip for 2015 - stick to prime and look very hard at the equivalent yield.

James Watson is head of retail investment at Colliers International

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