Retail market update Q1 2023

Retail sales ticked up slightly in January but are still down on a three-monthly basis from the post-pandemic highs in the summer of 2021.

The volume of non-store retail sales is still 15% higher than pre-pandemic levels, but have receded sharply from the highs at the start of the first lockdown back in Spring 2020. In a rising interest-rate environment, with higher borrowing costs, this trend will continue to put pressure on online retailers.

While inflation rates are set to ease significantly this year, the country will either enter recession or come close, putting more pressure on consumers’ wallets. However, demand is not set to crumble, the ‘lipstick effect’ of previous recessions signals that consumers move towards less expensive luxury goods amid economic downturns, turning to retail as a relief from economic turbulence. In addition, the GfK consumer confidence index ticked up in February to -38 from -45 in January, after a low of -50 late last year. While the index of confidence is still in negative territory, it does suggest consumers are feeling slightly brighter in Q1 2023.

UK footfall in 2022 is still 14% below pre-pandemic levels according to data from Springboard, but it rose steadily throughout last year, with the greatest improvements in Greater London, the East of England, The East Midlands and Wales. As ever in retail, it is not a one size fits all trend – with overall footfall in retail parks down just 4% compared to 2019 levels, while on the high street, it is still 17% lower.

The supply of new retail property has been declining since a peak in 2016/17, and completions in the last three quarter of 2022 fell to the lowest level in at least a decade. This, alongside a move towards alternative uses (typically residential) should mean that there are reasonable levels of demand for available stock in the coming years, which should put some sort of floor under rents. In September 2022, the planning inspector overruled the Basildon borough council to approve plans to switch from a shopping centre development to a mixed-use development with 2,800 homes.

Retail rents were put under pressure during the pandemic. Since then, rents for retail warehouses have moved back into positive territory over the last year but are still showing only modest growth of c.1%. Overall, retail rental declines have eased to -1.9 in December, compared to double digit falls in 2021. This re-basing of rents should provide some stability. The benefits for the retail sector as a result of business rates reliefs may mean rents are more sustainable in the medium term, especially among the larger retailers who will benefit the most.

Retail yields have been factoring the higher risk within the sector for some years, which means the softening in these yields in the wake of the mini-budget has had less of an impact on capital values in recent months than in other sectors.

Data to end Q4 2022

unless otherwise stated
General retail
Current quarter
(last quarter / 5yr ave)
Qly take up (sq ft)2.5m sq ft (2.4m sq ft, 3.8m sq ft)
Rental growth (12-month rate) %*-1.9% (-3.8%, -6.2%)
Completions (gross delivered sq ft)918,000 (787,000, 1.6m)
Total under construction (sq ft) 6.8m sq ft (7.3m sq ft, 8.0m sq ft)
Qly sales volume (£)£692m (£1,112m, £1,603m)
Average initial yield %*7% (6.6%, 5.9%)
Prime yield % Q1 2023 (Q4 2022)6.5%-6.75% (6.5%)
Source: Cluttons, CoStar, * MSCI

Retail: key investment transactions

AddressLocationDateBuilding size sq ft (sub-sector)Sale price (£m)Net initial yieldBuyer
Cannon LaneTonbridgeQ4 202257,612 sq ft£22m5.25%Unknown
Trostre RoadLlanelliQ4 202282,046 sq ft
£66.5m5.3%Supermarket Income REIT
Willow Brook CentreBradley StokeQ4 2022250,000 sq ft£84m5.6%Supermarket Income REIT
Cantium Retail ParkLondon SE1Q1 202368,000 sq ft£38m5.70%London Metric Property
Princes MeadFarnboroughQ4 2022110,000 sq ft£17.6m8%Sovereign Housing Assoc
Source: Cluttons, CoStar

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