The pie chart below shows what an average UK real estate portfolio has looked like over the last 20 years.
‘Bricks and mortar’ retail real estate has historically represented almost 50% of the total. Now, however, this all looks set to change. Globally, total spend on internet retail was $1 trillion in 2012. It is now $2 trillion and is set to double again in four years’ time. Crucially, the rate of growth for UK online sales is far higher than it is for traditional retail, with internet sales now representing 15% of the total. In fact, UK millennials already buy 40% of their non-food items online – this should reach 50% in three years’ time.
Challenges ahead for landlords
As a result, fewer shops and shopping centres will be needed. With internet retail increasingly popular, consumers now expect far more from their overall retail experience to encourage them to visit a shopping centre. Therefore, it is crucial for retail landlords to identify in their locality what their customers want – and to provide them with relevant amenities and services, such as leisure activities and even healthcare services. Some of these changes are being driven by demographics – we are moving rapidly towards a time when 50% of the UK population will be over 50 years old.
People now want authenticity and customisation in their overall retail experiences
Post the global financial crisis, the focus on designer clothes and goods as a measure of status has lessened to an extent. We have, however, seen the advent of a new retail concept, the development of ‘athleisure’. This trend has seen clothing designed for exercise being worn in other contexts. It has been a true differentiator for certain retailers. Consumers are able to demonstrate their ‘wellness’ – the process of making choices towards a fulfilling and healthy life – by wearing athleisure clothing in work or social contexts. For example, I see parents collecting their children from school in yoga clothes! Customers also wanting to feel greater authenticity in their experience have demonstrated growing interest in where products are sourced from.
Consumers are getting older… and younger
Paradoxically, while one group of UK customers is getting older due to changes in demographics, customers are also getting younger. The advent of the smartphone has led to ‘pester power’ as children identify and price online the products they want. Purchases can then be made instantly, provided a parent has their credit card at hand and is in a good mood.
Distribution patterns are changing because of the revolution in retail sales
Two to three times as much warehousing and distribution space is needed to service internet consumers compared with a traditional store. Parcels being sent out are smaller but there are far more of them as they go to each customer. Consumers also expect a broader range of goods online than in a store so more stock needs to be held and a return of goods facility is required. The growth in demand for warehousing space means higher income potential for real estate investors. Estimates suggest as much as 900 million square feet of extra space may be needed. In fact, the equivalent of 10,500 football pitches of warehousing and distribution space will be needed over the next 15 years.
Amazon’s arrival transforms a country’s distribution environment
To look at what is driving the change in distribution we need to look back to 1998, when Amazon arrived in the UK. As we have seen, UK internet sales have grown rapidly and have now hit 15%. We see the UK being at the forefront of a global trend whereby the arrival of Amazon in a country can boost internet sales and transform distribution, thereby leading to opportunities for real estate investors. Future markets to watch are Spain, where Amazon set up in 2011, and Australia, where Amazon has just set up and where, currently, internet sales are only 5%.
How the UK real estate sector might evolve
Looking again at our real estate pie chart, we see the proportion for distribution and warehouses growing substantially while traditional retail will take a lesser share. The future could therefore look very different.