UK retail properties could lose up to 70% in value as a result of rent cuts, according to a report by Fidelity International.
The investment manager said it expects UK retail real estate values to fall by 20% to 70%, depending upon the nature and quality of the assets.
The correction will be driven in part by a 10-40% reduction in rents to make them sustainable and affordable for bricks-and-mortar retailers.
But Fidelity said it would also be caused by a de-rating of the sector equivalent to 10% to 30%, reflecting the change in risk profile of the underlying tenants and their future cashflows.
Adrian Benedict, investment director at Fidelity International, said: “What was once the most attractive real estate asset class is fast becoming its bête noire.
“Within a few years, the disruptor has become the disrupted, and landlords have been blindsided.”
Data from the report revealed that from the first quarter of 2015 to October 2018, the value of the unlisted UK retail sector had fallen 5%, whereas listed retailers during the period experienced a 17% drop.
Listed non-food retailers recorded a 34% drop and listed retail REITs saw the greatest fall (37%) during the same period.
Fidelity said that, in the past three years, “profitability among bricks-and-mortar retailers in the UK has shown a marked deterioration”, a performance which can be reverted if rental costs fall by 10% to 40%.
“This would ultimately lead to a significant de-rating for UK retail real estate, which Fidelity estimates could amount to anything from 10% to 30%.”
Benedict said: “This would be the sharpest correction in UK retail rents in living memory, and would have major repercussions for landlords.
“Retail real estate would transform from a defensive, premium asset class into one of the most volatile elements in any real estate portfolio.”
Looking beyond the UK, Fidelity said all countries with “high retail space per capita, weakening consumer spending growth or a structure change to GDP away from consumer-driven growth are at risk of market repricing; with France and Australia being two markets of particular concern”.
Benedict said: “In short, bricks-and-mortar retailers have had no choice but to cut costs in order to survive, and when doing so their options are limited.
“Rent is essentially the only key cost, amongst wages and supply costs that can be meaningfully reduced; leaving retail real estate investors in the direct firing line.”