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Retail sector braces itself for a roller-coaster ride

After a record year, analysts say oversupply of space and the squeeze on finance are causing the cancellation of many projects

Retail construction has never been famed for being a steady ship. But this volatile sector is facing choppy waters, even by its own standards.

There is about 20 million square feet of new retail space planned for the UK over the next three to five years.

However, property consultancy Savills predicts around half of that space could be abandoned as developers struggle to secure bank finance.

Landlords are struggling to fill plots and a swathe of retail insolvencies are also expected in the New Year.

The latest Royal Institution of Chartered Surveyors commercial property survey shows 59 per cent more chartered surveyors reported a fall rather than a rise in demand for retail property.

Developer Hammerson is not expecting to start any new major projects for at least a year after posting losses in excess of £400 million in the first half of 2008.

Shopping centre giant Liberty International – owner of Lakeside Shopping Centre in Essex and the MetroCentre in Gateshead – has doubled its provision for tenant failures for next year to £10.2 million.

“Torrid Christmas” on way

Jason Sibthorpe, of property consultant GVA Grimley, said: “The retailer market is going to be tough and it is going to be a torrid Christmas.

“Firms will fall by the wayside in the New Year. It wouldn’t be a big surprise if we saw a relatively big name go out of business.

“The construction of new builds will slow. There will be a possibility for more refurbishment work.

“But it remains to be seen how many retailers will want to soak up excess supply of retail space on the market. More will want to focus on consolidation.”

Increasing retail sales over the past decade have broadly been followed by an upward pattern in retail construction.

But while retail sales are still expected to grow, they are forecast to drop below GDP growth.

Information service provider Planet Retail expects GDP to grow by five per cent in nominal terms in 2010, but retail to go up by just 3.6 per cent.

And for the period from 2007 to 2013, a 32 per cent GDP growth forecast contrasts a much lower 26 per cent retail sales growth forecast.

There are some positives out there though – supermarkets are still buoyant with £440 million of new development this year to September.

And the British Council for Shopping Centres said this year has in fact been the strongest for centre development in two decades, with 13 major sites scheduled for completion by the close of 2008.

Westfield’s White City shopping mall is understood to have opened with just 13 vacant plots, which in this current climate should not be underestimated.

But there are signs that even the high-profile centre has felt the economic pressures.

Retailers, including the Arcadia Group and fashion chain New Look, say they were given a guide price of about £8 per square foot for service fees, but they are now being charged £14.