Commercial Quarterly Examiner – retail market update Q4 2024

The other side of the growth of occupier and investment demand for industrial and logistics property has been a long drawn-out decline of the
physical retail space.

Empty and boarded shops were at first blamed on ‘unfair’ competition from out-of-town retail parks who benefitted from cheaper rents, free car parking and lower business rates. 

The ONS first started monitoring online sales in 2008 when internet sales represented just 4% of all UK retailing. But the writing had been on the wall for some retailers well before then. Amazon started selling books in 1995 and began selling CDs in 1998. Apple introduced the first iPod in 2001 with a 5GB hard drive capable of storing about 1,000 songs. Early retail casualties included Borders books, Books etc, Tower Records, Virgin Megastores and Woolworths. 

Online penetration of retail sales peaked at 37% during the second lockdown of early 2021 at which point the internet accounted for 65% of all clothing and footwear sales. After the removal of all pandemic restrictions, internet sales fell to 25% within 18 months and have remained at that level ever since. 

UK shopping centres, retail parks, and high streets saw a 2.2% decline in footfall compared to the previous year. High Street footfall decreased 2.2% and shopping centres experienced a 3.3% drop. Retail Park footfall remained unchanged.  

According to the BRC In-Store Non-Food sales increased by 0.4% year on year in December, against a decline of 2.9% in December 2023. However, online Non-Food sales increased by 11.1% year on year in December, against a decline of 0.8% in December 2023. As usual the UK weather has been cited as an important factor. Online sales were apparently boosted by some bleak winter weather, particularly in electronics and homeware, as storms Darragh and Bert kept shoppers off the High Street and behind their laptops. 

Next reported that online Christmas sales grew by 6.1% but retail sales fell by -2.1% on a like for like basis compared with the same period last year. Although M&S reported like for like Clothing, Home and Beauty sales were up 1.9% over the Christmas period but store sales fell 1.5%. Other smaller specialist clothing and footwear specialists, like Quiz and Shoe Zone, faced challenges. 

Occupational view  

The availability of retail space had been on a declining trend since the UK economy first started to re-emerge after Covid. But recent quarters have seen an uptick in availability across all three retail segments. Net absorption of traditional retail space and Shopping Centres has been negative for at least the last year despite a welcome increase in the take-up of vacant shopping centre space. 

Demand and take-up of retail premises has improved in some centres, especially wealthier suburbs of Greater London, cathedral cities and affluent areas of the South East, but elsewhere vacancy rates remain elevated. This characteristic of empty shops is not uniform across the country and some of the UK’s strongest retail locations have much lower vacancy levels. In some cases, this has been reflected in upward pressure on rents albeit after an average -19% decrease in High Street rental values since December 2017. 

The latest market indices are showing positive rental growth in the 12 months to December 2024 across all retail segments led by Central London and Rest of UK shops. But this varies from centre to centre. Asking rents for High Street and Shopping Centre units have been falling in Brighton, Norwich and Peterborough but increasing in Liverpool, Manchester and Bristol. 

Major retailers such as M&S, Aldi, Next, and Primark are maintaining their commitment to bricks-and-mortar stores and have expanded their portfolios and invested in store upgrades and modernization. However, M&S and Next, in particular, are growing their out-of-town portfolios at the expense of the more traditional High Street. Retail Parks provide more efficient and larger space that can house their entire product range, serviced by ample car parking space and supported by independent on-site cafes, restaurants and other leisure occupiers. 

Changes to fiscal and employment policy announced in the budget are likely to increase the overheads of many retailers. Higher National Insurance contributions will add around £250 million to Tesco’s annual costs. A letter to Chancellor Rachel Reeves, co-ordinated by the British Retail Consortium and signed by Boots, Next and M&S amongst others, warns that the increase in NIC contributions as well as the national living wage could trigger both job losses and higher prices. Although the same retailers could also gain from an increase in net disposable income amongst a section of the UK’s consumers. 

The increase in employment costs will also be borne by landlords responsible for the repair and maintenance of shopping centres. They will surely seek to recover this through charging their occupiers higher levels of service charge. Any preliminary indication of increasing market rental value growth will be squeezed out by higher management costs as occupiers remain focused on their total occupancy costs. However, those centres where the service charge has been capped may benefit from an uplift in headline rents. 

High Street and Shopping Centre occupiers have long complained about the unfair burden of high business rates. Finally, a 75% discount for retail, hospitality and leisure (RHL) occupiers was introduced for 2023/24 and extended to 2024/25. The new Labour Government has further extended the relief to 2025/26 but reduced the discount to 40%. A permanent lower multiplier for RHL occupiers funded by a higher multiplier on larger distribution warehouses occupied by ‘online giants’, will follow a consultation exercise but delayed until 2026/27. 

Investment view 

High income returns and a slight re-rating in yields have produced some strong performance numbers from Shopping Centres and Retail Warehouses, relative to 2024’s All Property average. Two of the investment transactions highlighted in one of the tables opposite are illustrative. Fremlin Walk in Maidstone was anchored by House of Fraser which finally entered administration in 2018 and was acquired by Mike Ashley’s Sports Direct (now Frasers Group). Last year the Fremlin Walk store was refurbished and rebranded as Fraser, with the centre being sold in September by M&G Real Estate to Frasers Group for £25 million (NIY 10.3%). 

In 2013 AustralianSuper, a not-for-profit pension fund based in Melbourne, acquired a 50% stake in Centre:mk, Milton Keynes 1.3 million sf regional shopping mall occupied by M&S, John Lewis, Harrods Boots, Next and others, for £269.66 million reflecting a net initial yield of 5.34%. In November 2024, AustralianSuper sold its interest to Royal London Asset Management for £140 million ± a 9.00% net initial yield. 

Further evidence of activity in the shopping centre space is provided by Landsec’s acquisition of a 92% stake in Liverpool ONE for £490m from the Abu Dhabi Investment Authority (69%) and Grosvenor (23%). A £35m payment to ADIA has been deferred for two years and Landsec’s initial £455m investment is expected to yield a 7.5% return. Landsec’s strategy is to boost its investment in major retail destinations, using proceeds from £464m of non-core sales earlier this year. Landsec now owns and manages seven of the UK’s 30 top shopping centres. 

Institutional demand for retail warehousing investments also remains strong. In October last year, British Land acquired a retail warehouse portfolio of seven assets from Brookfield, a global real estate investment manager, in Didcot, Rugby, Falkirk, Waterlooville, St Helens, Middlesborough, Telford and Nottingham, for £600 million with a blended 7.20% net initial yield. 

Investors are also beginning to re-invest in the High Street. The expectation of further reductions in base rates and a perception that Shops are ‘cheap’ after a 43% fall in capital values since their peak in early 2018, is likely to boost further investment interest in the High Street, particularly where assets are available with residential upper floors.