The UK retail sector faces a highly uncertain future. A weaker pound has pushed inflation gradually higher over the last year. It is now 60 basis points higher than the rate of wage growth. Therefore, consumer spending is likely to come under a degree of pressure.
Alongside this, the scope for an interest rate rise seems to be increasing. This could be another blow for retailers; many of whom were already reporting a slowdown before the EU referendum sparked a depreciation of the pound. Therefore, demand for retail space may slow to some degree. However, with low valuations, high yields and diversified locations, shopping centre operators such as Intu (LSE: INTU) and Hansteen (LON:HSTN) could have investment potential.
A changing economy
Brexit has thus far proven to be a catalyst for change within the UK economy. In the course of the last year, the outlook for the retail sector has deteriorated. Although there was a gradual slowdown for many high street stores in the first half of 2016, the outlook for the industry has worsened since then.
Consumer disposable incomes are now falling in real terms, which has historically meant spending levels have come under pressure. Due to higher inflation, though, a 0.25% interest rate rise now seems more likely. In fact, at the most recent MPC meeting, there was a split in voting. Rates were maintained at 0.25% by a 5-3 majority, but given recent comments made by various MPC members there could be an interest rate rise in the coming months.
Shopping centre potential
A weak period for retailers inevitably means less expansion and lower demand for retail space. This could impact negatively on shopping centre operators such as Hansteen and Intu. The two REITs could experience a fall in occupancy rates or failure to increase rental payments by as much as anticipated, although this may not happen in the short run due to the length of current leases.
these figures suggest there is a relatively wide margin of safety on offer for new investors
This risk, though, seems to be fully priced in. Hansteen has a P/B of 1.1, while Intu’s is even lower at 0.7. Both of these figures suggest there is a relatively wide margin of safety on offer for new investors. This reduces risk, while Hansteen’s exposure to Europe may also provide a boost from a weak pound and the more positive outlook for consumers in the Eurozone, where monetary policy remains highly accommodative.
Income prospects
Additionally, Hansteen yields 4.6% and Intu has a dividend yield of 5.4%. Both of these figures are likely to remain ahead of inflation and could therefore shore up demand for the two stocks over the medium term. Hansteen may even be able to raise dividends due to it having dividend cover of 1.4x, while Intu’s cover of 1.05x may be a further reason for its lower valuation.
Undoubtedly, both stocks carry risk due to the uncertainty within the UK retail sector. However, with low valuations and high yields, they could be a means of generating real yields from property investment.
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