UK shop rental values will fall by 23 per cent by the end of 2010, according to Colliers CRE. The worst economic recession since the 1930s has taken its toll on the retail sector with capital values for some properties falling by up to half, eradicating many investors’ equity and making banks the owners of many shopping centres and high streets.

At its peak at the end of 2006, the entire UK retail property sector was worth around £93bn according to IPD. This fell to £60bn by the end of 2008 and Colliers CRE forecasts it will fall to £48bn by the end of 2009. However, the agent says the free fall in capital values is now over, the market has fractured into a veneer of bond quality properties let to good tenant covenants and on reasonable unexpired lease terms where investor demand is strong.

The remainder of the market remains susceptible to tenants of a mixed covenant status where capital values are likely to fall further. Central London, the large, dominant in and out of town regional centres and the much smaller market towns are faring the best, as they did in the 1990s. Discount retailers and those with very strong brands are also trading much better than those in the middle ground who cannot appeal on price or quality to an ever more discerning market.

Landlords appear to have learnt the lesson of the early 1990s, in part forced upon them by the Government’s implementation of full vacant rate payments and are now prepared to keep units occupied almost on any terms. Rent free periods and/or incentives equal to two or three years are common place with extreme examples of five or even six years rent free being accepted.

Short term leases on a turnover basis are often being entered into but at least the occupancy of a unit helps maintain vibrancy and a feeling of well being in shopping centres and high streets.

In the year to May 2008, prime retail rents had increased, on average, by 1.1 per cent in Great Britain. This year’s figure, however, paints a very different, and somewhat gloomy, picture of the in-town retail market with rents falling by -12.2 per cent during the 12 months to May 2009 – the largest ever decline in the 22 year history of Colliers CRE’s retail rents monitor. This is based on net effective rental values, reflecting rent free periods and capital contributions generally required by retailers which have significantly reduced the headline rents being achieved.

Russell Francis, head of valuation at Colliers CRE said: “If 2007 and 2008 were the years of yield weakness, 2009 and 2010 will be the years of rental value falls. “