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The ‘Brexit effect’ on London Retail

Mark A. Smith, Head of Central London Retail Agency at JLL discusses the outlook for 2017

LONDON, 24 January 2017 - Reflecting on 2016, it’s difficult to think of a year where so much has happened politically, both on the national and international stage and where the only certainty seems to be uncertainty. While 2017 will bring no real clarity on the eventual Brexit deal following the country’s decision to leave the EU last year, the UK economy will continue to show resilience. While it will grow less strongly than in recent years, the UK will still outperform most other developed nations. Specifically, the ‘Brexit effect’ on London retail has been broadly positive with many retailers benefiting from increased sales thanks to a deflated currency and increased tourist numbers, but will we see the trend continue in 2017?

The Great British Pound has been on a bit of a rollercoaster ride over the last seven months. In fact, it earned the accolade of second worst-performing mainstream currency in the world in 2016, just ahead of the Argentine Peso. The sudden devaluation in sterling relative to the euro and US dollar last year gave retailers an opportunity to benefit from increased tourist spend. Figures from the Centre for Retail Research and IMRG show that foreign tourists, mainly from China and the Far East, fronted a £4 billion Boxing Day splurge as they took advantage of a weak pound and big discounts on luxury goods. The week beginning the 26 December, saw the most significant year on year growth of any week in 2016 in London’s West End according to recent figures from New West End Company (NWEC). Department store, Selfridges announced that within its first hour of trading Boxing Day, £2 million worth of sales had been transacted in its Oxford Circus store.

In spite of slight currency improvements towards the end of 2016, and an initial rally following Theresa May’s confirmation last week that Britain would exit the single market as a result of Brexit, the pound is still showing its vulnerability. . In the face of such uncertainty, it is hardly surprising that economists are watching intently for signs of dwindling consumer spending, particularly given that UK retail sales growth is forecast to dip to 2% in 2017, from an average of 4.1% over the last three years, according to Oxford Economics. Consumer spending has been one of the driving forces of the UK’s recovery since the 2008 financial crisis and has helped the economy withstand the shock waves of the vote to leave the EU. Overseas visitors are expected to spend £24.1bn next year, up 8% on 2016, according to VisitBritain.

However, the proposed reduction in consumer spending will not be uniformly felt across the country, with major retail centres such as Central London likely to demonstrate ongoing resilience, at the expense of less relevant centres that have been slow to respond to both cyclical and structural change. London has been a strong and dynamic player in the market for some time and will endure into 2017. JLL’s latest retail report, ‘Destination Retail’ identifies London as the most attractive location for international retailers globally and a magnet for new brands thanks to its unique blend of market size, maturity and high degree of transparency. London’s edge in the ‘luxury’ rankings, just ahead of Hong Kong, is in part, due to its heritage and strong tourism flows as well as the strength of locations such as the ‘London Luxury Quarter’, which is a distinct luxury destination in the heart of London, unique in international terms. JLL expects demand from retailers to remain robust in 2017/2018, in part driven by the costs to entry being cheaper.

It is a double edged sword of course. While in the short term, London has been an undoubted beneficiary of a weak pound, there are however some serious headwinds ahead for retailers in a post-Brexit world. Rising employment costs in 2017 will be a big challenge for retailers, with the National Living Wage set to increase in April. In the same month, they will feel the effects of the next rating revaluation with prime locations, such as Central London, experiencing steep increases in their rates liabilities.

In addition, rising import costs as a result of post-referendum currency fluctuations and increased trade tariffs may have to be passed onto the consumer, or retailer margins will be cut. Some larger retailers will be better positioned to bear the impact, offsetting it by currency hedging (although hedging will unwind), and economies of scale. The British Retail Consortium is lobbying government hard over concerns of increased trade tariffs. Given the retail industry is the UK’s biggest importer, securing the right deal with Brussels sooner rather than later would be welcomed by many.

Despite these headwinds, relevant and innovative retailers with customer-focussed digital strategies, strong cost management, and a well-located store portfolio, will continue to thrive. As will retail locations such as Central London, which have all the ‘success attributes’ in place to ensure continuing resilience. Ongoing initiatives and improvements to the shopping environment, championed by the likes of New West End Company and the big London estates, including the proposed pedestrianisation of Oxford Street, will help keep London’s West End at the forefront of international retailing. Whatever way we dress it up, 2017 will present a range of challenges for the retail sector, but London is arguably in pole position to weather the challenges that lie ahead.

Mark A. Smith, Head of Central London Retail Agency, JLL

Published in Retail Week