Alice Rigby
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Updated 07 Jul 2023
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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

An FT deep-dive into the outlook for UK retailers this week caught my attention. While headline sales figures were surprisingly buoyant in May (although one could argue that warm weather following a prolonged cold snap at least partly explains this), the retail experts interviewed in the piece were quick to offer several cautious notes.

Firstly, sales numbers by value may have risen but volumes have stalled. At the same time, some segments of the market are struggling, notably mid-range retailers and eateries. Instead, businesses catering to wealthier customers are holding up, as mortgage rate rises prove more of an irritation than a life-altering factor for this segment.

At the opposite end of the spectrum, discount retailers are also flourishing. Like-for-like sales at one of the UK’s largest chains, B&M, were up 9.2% in the three month period to 24/06/2023.

Trading in big-name essentials alongside some own brand and household extras, its chief executive believes that shoppers are trading down to it. In the context of rising prices, bargain hunting is back in vogue. However, this doesn’t mean that any retailer trading in cheaper goods is flourishing; the online fast fashion chains that attracted significant premiums in the last decade are almost universally struggling.

Instead, it is specifically the discount chains – B&M, Home Bargains, Poundland – that pick up those shoppers priced out of buying garden nick-nacks and other miscellaneous small-ticket products at mid-market retailers. With B&M operating with an adjusted EBITDA margin of over 10% according to its latest results, well above the average in UK retail, these retailers are also an interesting investment proposition. Accordingly, and perhaps frustratingly, the majority are privately held.

However, for investment trust buyers, there is one available avenue to gain exposure to these resilient retailers. Given their robust earnings in challenging economic conditions, these retailers make especially attractive tenants for commercial property landlords, including some REITs.

One such trust is UK Commercial Property REIT (UKCM), which counts Home Bargains as a tenant in some of its out-of-town retail parks, including one of its most recent acquisitions. Elsewhere, the trust is well-positioned in industrial property, particularly that geared towards logistics and distribution which should hold up as the tilt towards e-commerce spearheaded by the pandemic is baked in.

With similar exposure to discounter tenants is Balanced Commercial Property Trust (BCPT), which counts B&M and Home Bargains as tenants at two of its three largest holdings. In fact, retail warehousing (which out-of-town parks are a constituent part of) forms a key strategic subsector for the trust, alongside student accommodation and logistics-focused industrials.

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