The R rate has become synonymous with the COVID-19 pandemic.  If R is above 1, infections rise exponentially, if R is below 1, the virus eventually disappears.

The impact of online spending on retail rental growth is also exponential and can be expressed in a similar form: the R rate for the High Street. The High Street R can be used to explain the accelerating fall in high street rents and rising cap rates post the Global Financial Crisis (GFC).

The R for an infection will naturally wane as the susceptible population declines.  Similarly, in time, the growth of online retailing must also decline. This gives hope to investors for better rental growth prospects ahead, although for some retail property, rents will have fallen below that achievable for other uses and are likely to be converted well before this point is reached.

However distant the inflection point is from today, the expectation of improving rental trends would be expected to translate into a slow reversal of the rise in cap rates, even as online sales continue to grow.

High street rental growth and household spending

Retailers have suffered during the COVID-19 crisis, firstly due to the lockdown and then to the reluctance of shoppers to return to the high street. Many retailers had already been struggling due to the increase in online shopping and the pandemic has proven to be their death-knell.

Going forward, shoppers will return, but the rapid growth in online shopping is also likely to continue. Rental levels are therefore unlikely to return to pre-COVID levels anytime soon.

A similar effect was seen after the GFC.  Until the end of the last decade, shopping centre rental value growth had a direct relationship to household spending growth: falling in the recession of the early nineties, but then recovering strongly.