Retail market update Spring 2024

Some bright spots.

In short: Take-up rose towards the end of 2023, but overall vacancy rates are flattered by the lack of supply in the market. The bright spot for landlords is luxury retail and retail parks, where consumer demand is still relatively stronger. Investment activity in these markets has also been stronger through 2023, although total investment volumes was half the 10-year average in 2023. Given the re-pricing in shopping centres, there were some large investment deals in this sector in 2023 driven by large discounts to asking price. Investors are also looking for opportunities for re-development or change of use.

The retailing environment remained tough at the end of 2023, with sales volumes falling by 3.3% in December. Sales volumes have staged a bit of a recovery in the first few months of this year, but the impact of the cost-of-living crisis and falling GDP per head is having a material effect on household disposable income. The outlook for this year is brighter amid falling inflation and expected base rate cuts.

Take up of retail space rose in Q4 2023 amid key deals by discounters and grocery stores, but take up still remains below the five-year average, highlighting the tough landscape for the retail sector.

While the vacancy rate for general retail is at 2.6% for general retail, down from 2.9% in August, this does not indicate a sharp rise in demand. Rather vacancy rates are being kept low by limited supply of retail space. Around 5.1 million square feet of retail space is under construction across the UK, well below the five-year average of 8.1 million square feet.

For shopping centres, the sector which is facing the biggest challenges, the vacancy rate has risen to 5.5% from 5.3% mid-way through last year.

The best performing part of the market is retail parks, and this is reflected by a low vacancy rate of 2% – the lowest rate in 15 years. The range of shopping coupled with parking and additional amenity is creating high levels of consumer footfall, translating into more demand for retail space in these locations.

In London, the vacancy rate is 2.5% as luxury retailers continue to move and upgrade their stores. Improved transport links, the return of overseas visitors and office workers have all boosted central London retail markets, especially around the Elizabeth line stations in Oxford Street and Bond Street. But the removal of tax-free shopping for international visitors has impacted footfall and sales. The interest from investors in taking retail space for alternative use will further limit supply in the market, which should put a lid on the vacancy rate and support rents. The definition of prime retail across the UK is narrowing however, with geographies that encompass prime shrinking in many cities and towns across the country.

Manchester’s vacancy rate is at 2.7%, and while demand has been more muted, development activity has also slowed, keeping this rate stable.

Retail rents were correcting before the pandemic. The dramatic impact of lockdowns on the high street meant that rents fell sharply before rebounding ins some sectors. That re-balancing is now ending, and average retail rents were showing only limited growth of 0.9% at the end of 2023. Average rents in central London slowed to 2% in December 2023, down from 6.7% in April, even with the increased activity among luxury retailers.

Shopping centre rental growth is still in negative territory – average rents for these assets have fallen by nearly 30% on average over the last five years, and there is further to go, for assets in both prime as well as secondary centres as working from home and online shopping impact demand and footfall.

Business rates, which affect retail business particularly strongly, are set to rise by 6.7% from April. The multiplier is rising 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.

As the economy starts to recover into 2025, average rental growth for the retail sector as a whole will continue to show modest rises.

Investment volumes fell in 2023. Some £6.2 billion was invested into the UK retail sector in 2023, down from around £8 billion in 2022 and well down on the five-year average of £10 billion, highlighting how investors are holding off against a backdrop of higher interest rates and lower consumer demand. Investment in the London market, which started strongly at the start of 2023 also slowed towards the end of the year, so total sales were worth £1.6 billion, only half the 10-year average of £3.2 billion.

Just as occupier demand is more robust in retail parks, investor demand has also been in evidence for this type of investment, with several large retail park purchases in Bristol and Fife. London’s luxury retail market also attracted investment during the year, with notable sales in New Bond Street and Old Bond Street. While shopping centres have been have struggled in terms of occupier demand, there was a pick-up in investment activity which had fallen to a 23-year low. Investors showed their willingness to invest when the price was right. For example, Ikea’s Ingka Group bought Brighton’s Churchill Square shopping centre at a 43% discount from the asking price at £143 million in November last year.

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.

As inflation and interest rates fall this year, and the consumer spending picks up, there will more more investment activity this year.

Yields have hardened throughout the course of 2023 and have now largely stabilised at levels that are around 200 basis points higher than pre-pandemic averages.  

Retail: Key investment transactions

Address	Location	Date	Building size sqft	Yield (%)	Sale price (£)	Buye
Aviva Supermarket portfolio	Sutton (see below), Milton Keynes & Leigh	Q1 2024	–	5.4%-6.3%	£100m	MDSR Investments
287A High, Sutton (Sainsbury)	Sutton	Q1 2024	95,457	6.3%	£54.7m	MDSR Investments
Meridian Leisure Park	Leicester	Q1 2024	155,071	8.5%	£25m	Greenridge Opportunities LP
118/121 High Street	Winchester	Q1 2024	26,083	8.3%	£8.2m	Apperly Estates
12-13 Conduit Street, W1	London	Q4 2023	15,902	3.7%	£32m	Private
Churchill Square	Brighton	Q4 2023	522,086	10.2%	£143m	Ingka Holding BV
Almondvale Boulevard	Edinburgh	Q4 2023	776,614	14.5%	£45.5m	M Core

Key statistics:

Retail: Data to end Q4 2023 unless otherwise stated	General retail
	Latest quarter (Previous quarter / 5yr ave)
Occupier
Availability rate %	3.2% (3.1%/3.9%)
Vacancy rate %	3.0% (3.0%/2.7%)
Rental growth % annual	0.3% (-0.8%/-0.9%)
Quarterly take up sqft	4.1m sqft (3.5m/4.8m)
Supply
Completions (gross delivered) sqft	786,000m (618,000m/1.6m)
Total under construction sqft	5.2m sqft (5.2m/8.2m)
Investment
Quarterly sales volume £	£1.4bn (£1.4bn/£2.1bn)
Average initial yield %*	6.6% (6.6%/6.4%)
Retail Warehouse initial yield % March 2024 (Q4 2023)	6.00% (6.25%)
Prime Town High Street yield % March 2024 (Q4 2023)	7.0 +% (7.0+%)

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