Retail market update Autumn 2024

Value add.

In short: The momentum that was building in the sector in late 2023 has stalled in H1, thanks to rising business costs. But the wider landscape is improving – retail sales are edging up, and footfall is also improving across all sectors. In fact, footfall in retail parks actually rose in July, the first annual rise in at least two years. A lack of new retail development will put a floor under vacancy rates and rents, and luxury retail and retail parks still lead the way – with some large investment deals in central London in recent months. The Government has promised to reform business rates, but this will take time – years at least

The challenges in the retailing environment are easing slightly amid rising consumer confidence. But the cost of living is still relatively higher compared to pre-pandemic, and as such the volume of retail sales has yet to pick up materially

Retail sales are starting to recover, while volumes have ticked up from a low at the end of 2023, the value of sales continues to climb even as inflation has fallen back, signalling a higher spend among consumers.

The impact of internet sales has fallen since the pandemic, but the level of internet sales is still well up compared to 2019. However, seeing online sales as a blunt threat to high streets may not be the full story. Some of the areas of the country which register the highest levels of internet sales are also those where the high street is thriving, according to a recent Centre for Cities report. The health of high street seems more closely correlated to other factors such as the level of disposable income and the local jobs market.

The improvement in the retail landscape is also highlighted by the footfall numbers below from the British Retail Consortium (BRC), which shows an improvement across the board, with the first annual rise in footfall in Retail Parks in at least two years.

But the scale of the challenge in the retail sector is highlighted by research from the centre of retail research which shows 62 retail businesses failed in 2023 – the highest number since the research began in 2007. However, this resulted in only 971 store closures, while the 54 retail business failures in 2020 affected 5,214 stores closing.

The average vacancy rate is 3.1%, but this rises to 6.2% for shopping centres, according to CoStar. Around a quarter of all UK shopping centres, some 171 assets, have a vacancy rate of more than 10% – while only one in ten of high streets and 3% of retail parks have this level of vacancy

Retail parks have the lowest vacancy rate at 2.3%, below pre-Covid levels, and are the most resilient to store closures

Rents re-based during the pandemic, and there is now rental growth being registered for high street shops (up 1.1% in the year to June) and retail warehouses (+1.4%)

On the High Street: tenant demand is increasing as rents have been re-based and in some UK cities this is spurring rental growth. Investors are now seeing the high street as an opportunity given both the re-based rents and decrease in values over the last 10 years. Cathedral cities and “villages” in Greater London are seen as locations with good potential

Retail Parks: The occupational dynamics for retail parks are strong with an established pool of retailers expanding their portfolios. A small number of active domestic and overseas institutional investors have dominated, but there is no shortage of active investment requirements

Shopping Centres: This is a polarised sector, with dominant regional & right-sized convenience centres sought after while shopping centres that are no longer fit-for purpose at the at the other end of the scale. Yields for even the best stock now at 8.00% -10%, and deal volumes are likely to remain subdued for the foreseeable future

Foodstores: Growth remains in the convenience sector. Very limited activity for the larger out of town stores. Rental growth for large stores is flat in South East, but other parts of the UK are seeing rents fall. There is keen interest from a range of institutional and specialist investors – deal volumes in 2023 of £2.49bn boosted by Asda S&L (£650m) and Sainsbury’s (£430m)

The Levelling Up & Regeneration Act (LURA) comes into force later this year, and this will allow Councils to force vacant units into compulsory rental auctions if the property has been unoccupied for a year, or 366 days in last two years. More than 9% of the UK’s high street units have been vacant for more than a year, and landlords have eight weeks to find a tenant once a Council has served notice that it intends to force an auction. Moving ahead with this will require manpower and finances, which has been an issue for Councils in recent years.

Business rates, which affect retail business particularly strongly, rose by 6.7% from April. The multiplier increased for properties with a retail value of more than £51,000, from 51.2p to 54.6p (the multiplier will be static for properties worth less than £51,000). There is a 75% business rate relief available for qualifying retailers up to £110,000 per retailer, which will benefit small retailers. The Government has repeatedly said it will reform business rates, but as highlighted in our recent blog, the complexity of the rules mean this is unlikely to happen any time soon.

Investment volumes low again in H1. Some £6 billion was invested into the UK retail sector in H1, down from an annual average of £11 billion. This figure was supported by some large deals on Bond Street in London as shown in key investment deals below.

Yields are beginning to stabilise after moving out strongly in line with rising interest rates. The exception here is retail parks, where stronger demand and high occupancy rates, coupled with evidence of rental growth has pushed down yields.

The re-pricing in the shopping centre market, with owners now adjusting expectations accordingly have opened up this market for investment, with several large deals happening in Brighton and Livingston – all at large discounts to asking price.

In line with the industrial and office sectors, there is strong investor interest in schemes that have the potential for re-development, especially for residential and urban logistics.

Retail: Key investment transactions

Address	Location	Date	Building size sq ft	Yield (%)	Sale price (£)	Buyer
130-134 New Bond Street W1	London	Q2 2024	31,131	3.5%	£226.5m	Blackstone
178 New Bond Street W1	London	Q2 2024	3,364	2.3%	£82m	Richemont International
West 12 Shopping Centre W12	London	Q1 2024	300,000	6.4%	£58.5m	West 12 Investments
50 Pingle Dr Bicester Village Outlet Centre	Bicester	Q3 2024	348,637		£1.5bn	Hammerson
Purley Cross Retail Park	London	Q1 2024	126,410	5.5%	£59m	DTZ
Omni Centre Leith	Edinburgh	Q1 2024	221,354	8.1%	£64.1m	Triple B Ltd

Key Statistics

Retail: Data to end Q2 2024 unless otherwise stated	General retail
	Current quarter (last quarter / 5yr ave)
Occupier
Availability rate %	3.2% (3.1%/3.9%)
Vacancy rate %	3.1% (2.9%/2.7%)
Rental growth % annual	-0.2% (0.4%/-0.9%)
Quarterly take up sqft	2.5m sqft (3.6m/4.8m)
Supply
Completions (gross delivered) sqft	483,000m (841,000m/1.6m)
Total under construction sqft	4.9m sqft (5.3m/8.2m)
Investment
Quarterly sales volume £	£1.4bn (£1.4bn/£2.1bn)
Average initial yield %*	6.8% (6.8%/6.4%)
Prime Retail Warehouse initial yield % (Q1 2024)	5.75% (6.00%)
Prime Solus (15 yr)	6.0% (6.0%-6.25%)
Prime Shops % (Q1 2024)	6.75% (7.0+%)
Prime Dominant Regional Shopping Centre	8.25%+ (8.25%+)

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