Changing consumer behaviour and the impact on commercial real estate investors.

Consumer behaviour constantly changes and is affected by marginal propensity to spend, technology and trends. They can determine the success of real estate investments and may force an investor to reconsider their use. One such form of property that has been greatly affected by recent consumer behaviour are shopping centres.


There has been a huge shift to online retail with the growth of technology and the percentage of retail purchases made online has increased from 2.8% in November 2006 to 21.5% in November 2018. This has not only been caused by the growth in technology but has also been impacted by numerous other factors. Firstly, since the financial crisis, marginal propensity to consume has fallen, reflected by the increase in frugality and financial consciousness of the average British consumer. Real incomes have also fallen, with inflation outweighing wage increases for 7 years between 2008 and 2018. These factors have helped dampen overall retail demand and have shifted consumers to purchasing goods online. This may be because comparisons between the prices of products can be made more easily online as opposed to a shopping centre and the cost of ordering clothes is very minimal and sometimes free online whereas there are travel costs associated with conventional retail shopping. Consumers are also spending more on experiences rather than material objects and thus prefer to go to pubs or restaurants and less disposable income is spent at retail outlets. For example, figures for April 2018 show a 20% increase in spending in pubs, spending in restaurants went up 16%, while theatres and cinemas enjoyed a 13% rise. Meanwhile, department stores suffered a 1% drop, vehicle sales were down 11% and spending on household appliances fell by 2.5%.


This trend towards online may well grow beyond 21.5% and is seen by many retail firms as an opportunity to solve their poor performance. Next is a good example of the success that can be achieved through store closure and increasing online presence in order to boost sales and cut costs. Their share price, having decline throughout the year due to low profits, grew by 16.79% in the last month due to a rapid expansion of online sales. The success of Next and others may encourage struggling firms such as Debenhams to try to do the same. There is therefore less demand and willingness to pay for physical stores and companies such as the House of Fraser and the owner Mike Ashley have tried to renegotiate rental agreements to reduce their costs. This could greatly affect real estate investors such as Hammerson and Intu as the lower rental income will translate to lower profits and less dividends for shareholders. For pension fund investors there may be less income to pay out. This could put a lot of pressure on landlords to reduce the book value of their properties and put pressure on owners of property to inject fresh equity.


The reduction of book value of these investors’ properties would increase the loan to value ratio. This could potentially result in lenders to property companies asking for more equity to be injected which, all other things being equal, could negatively impact the share price. This has been reflected in the decline of the share price of Intu and Hammerson, which have decreased 60.19% and 35.4% in the past 2 years respectively to the extent that they are trading well below the NAV (see diagram below for Intu). The current discounts cannot continue indefinitely- either the NAV will have to be lowered as companies revalue their portfolios in light of current market conditions or the stock market may feel that the shares are over-sold and the share prices may rebound. A potential outcome could be a combination of the two. The NAV’s of these companies may be lowered as the Royal Institution for Chartered Surveyors (RICS) has instructed firms to reflect the chaos in the retail industry in their book values.



Therefore, the future for the profitability of these shopping centres should be questioned. Their current uses need to adapt to the change in consumer preferences and trends such as the provision of more places for experience such as restaurants, pubs or cinemas compared to the number of retail outlets. Another option may be to completely transform the centres into accommodation when they are located in areas where there is a high demand for affordable housing. This could occur for the more run-down shopping centres where rental demand is lower. Real estate investors may achieve more consistent and higher amounts of rental payment if this were the case, but the transition from shopping centre to apartment may cost more than the future income it creates. The market could see even greater downturns in the future with no end in sight has the market already discounted these changing trends and lower NAV’s or is there more pain to come for investors?”

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