With the rise in the cost of living dominating investment thoughts for 2022, what will be the likely impact on consumer spending habits and the funds that could benefit?
Energy bills soaring and inflation at 5.1%, combined with a tax hike this year, means less money in the pocket and less spend at the tills. Couple that with inflationary pressures on the retailers themselves – this week Next predicted an increase in clothing prices of up to 6% by the autumn after significant increases in the cost of manufacturing, shipping and hiring staff – and a squeeze on non-essential retail is inevitable.
As has been witnessed during the pandemic, supermarkets have cemented their place as an important part of the national infrastructure. The discount grocers Aldi and Lidl could continue to steal market share from the more established names as we look to keep our weekly grocery spend in check. There is a strong case for the discount retailers, such as B&M and Home Bargains, also being beneficiaries of the pinch in consumer spending.
What spare cash people do have is likely to be spent on the house, with our reliance and appreciation of our living environment having grown throughout the pandemic, to the benefit of the likes of Dunelm and B&Q.
What links all these retailers is property and more specifically the retail parks where they are located. Retail parks, which are situated on the edge of towns and cities, are largely occupied by these types of resilient retailers.
They also play a key role in the boom in online retailing, providing an ideal hub for click & collect and returns. Next reported this week a 20% rise in festive sales compared to pre-pandemic levels in 2019, which was made up of a 30% rise in online sales and a 5.4% fall in store sales. Next is big on encouraging online shoppers in to store to collect their purchases, thereby avoiding delivery costs and increasing store footfall, and the convenient location of retail parks and free parking make these vitally important for the omnichannel retailer.
Several real estate investment trusts (REITs) hold retail parks assets, but NewRiver REIT and Ediston Property Investment Company specialise in the sub-sector.
NewRiver is looking to more double its exposure to retail parks over the medium term to 50% (from 21% currently) by disposing of non-core assets (£290m over the next five years) and redeploying the capital into mainly retail park assets. Ediston is also selling off non-core office assets to become fully focused on retail parks.
NewRiver is trading on a wide 29% discount to net asset value (NAV), owing to its struggles over the past few years. However, it sold its pub business for £222m in August last year and reduced its debt pile so it now has a much more amenable loan to value ratio of 39.4%. Ediston, meanwhile, is currently trading at a 4.9% discount.
With consumers feeling the pinch in 2022, spending is likely to be concentrated on the types of retailers that call retail parks their home. REITs with exposure to them could be the beneficiaries.
QD view – feeling the pinch?