Retail market update Winter 2023

A slowing market

In short: Funds are still looking for opportunities in retail warehousing, but this market is slowing, and demand is being affected by the limited numbers of new occupiers active in the sector. Prime high street assets have stabilised and there is opportunity for future rental growth where values have been rebased. However, this comes against a backdrop of the changing definition of prime retail, with a shrinking number of locations meeting this criteria. Values for shopping centres will continue to fall, as a result of downward pressure on rents, but investors will be looking for opportunities for redevelopment for shopping centres in city centre locations. 

The retailing environment remains challenging. Retail sales fell again in September, unwinding the 0.4% tick up in August. Unseasonably warm weather and pressure on household budgets, as inflationary rises in prices of consumer goods mean budgets don’t stretch as far, are expected to continue to put downward pressure on sales. Retailers will be hoping for a bumper Christmas season, but some experts are warning that families may buy fewer and less expensive presents amid concerns about personal finances and the wider economic landscape moving into 2024. Consumer sentiment dipped again in October, which doesn’t bode well for October retail figures, with the GfK index falling to -30 from -21 in September.  

In central London, anecdotal evidence from a broad spectrum of retailers is that spend is strong across the year, and most brands are reporting a rise on 2019 volumes. Price increases have been passed on to consumers in premium and luxury segments, and those brands servicing ultra-high net worth consumers are experiencing no issue in upward pricing.

Demand rallied for retail space in Q3. The return to in-person shopping after the pandemic is still being felt through the sector, with rising footfall levels benefitting top-end high street and retail parks especially. This resulted in a small rise in demand for retail space, but this comes against a challenging backdrop for the sector.  

The vacancy rate, which is being kept relatively low by the lack of supply, has fallen to 2.6% for general retail as of November, down from 2.9% in August. However, for shopping centres, the sector which is facing stronger headwinds, it has risen to 5.4% from 5.3%.

In London, the vacancy rate is 2.5% as luxury retailers continue to move and upgrade their stores. While take-up is positive, it is still sitting at around 50% below pre-pandemic levels. Improved transport links, the return of overseas visitors and office workers have all boosted central London retail markets. 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. Fenwick on London’s New Bond Street will be redeveloped as a mixed-use asset.

This is also the case in Manchester, where the former Debenhams and House of Frasers stores are also being redeveloped as mixed-use assets. The average vacancy rate in the city is currently at 2.6%. Low levels of delivery of new stock in the city, as well as stock being bought for change of use, will help keep this vacancy rate in the sub-3% range.

A correction in retail rents was well underway before the pandemic, and this effective re-basing over the last five years means there has recently been room for recovery, with average UK high street rents registering an annual rise in the last three months for the first time since 2018. The stronger conditions for prime retail are underpinned by average retail rents in central London, which were up +4.7% on the year at the end of Q3. Some affluent districts such as Soho, Marylebone and Chelsea are experiencing exceptionally buoyant and competitive demand conditions.

Shopping centre rents are still re-basing to account for the new landscape – they 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. There is some further uncertainty however around business rates, which affects retail business particularly strongly. The rebasing of business rates for the high street and supermarkets last year was a fillip for the sector as most businesses’ rates bill fell substantially. However, the business rates multiplier rises in line with the rate of CPI each September, with the reading for this year’s inflation number coming in at +6.7%. Policymakers may choose to freeze the multiplier again as they have done in recent years, but this is yet to be confirmed.

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

Investment volumes were muted in Q3. The appetite for retail assets has remained constrained as rising interest rates and falling retail sales has curbed interest since the start of the year. In London, retail investment slowed again in Q3, moving further away from the five-year peak in investment in early 2022, when opportunistic investors were attracted by the relative discount on offer to other assets after the re-basing during the pandemic.

There is still interest from investors seeking prime retail assets which are seen as a safe-haven asset, or for assets that can be redeveloped for residential, last mile and urban logistics. Investors are also seeing particular opportunity for redevelopment on city centre shopping centres, for example, the residential plans for Palace Exchange and Palace Gardens in central Enfield. The trend is most prevalent in the South of England, where land values support viability.

At present, the UK market continues to be dominated by large supermarket transactions. Yields have softened since the middle of last year, but have largely stabilised at levels that are around 200 basis points higher than pre-pandemic averages.  

Retail: Key investment transactions

Address	Location	Date	Building size sq ft	Yield (%)	Sale price (£)	Buyer
171 New Bond Street, W1	London	Q3 2023	4,362	c.2.75%	£76m	The Swatch Group
The Bentall Centre, KT1	Kingston upon Thames	Q3 2023	334,630	8.4% NIY	£60m	Aviva
Sainsbury’s Islington, N1	London	Q3 2023	67,426	4.4%/4% RY	£56.3m	DTZ Investors Ltd
11 Tib Street, Transmission House, M4	Manchester	Q3 2023	14,436	9.5%	£2.8m	Fabrix London Ltd
175-179 Oxford Street	London	Q3 2023	21,223	6.1%	£33.5m
Portfolio Retail Parks UK	UK	Q3 2023	1.18m	–	£196.8m	Realty Income

Retail: Data to end Q3 2023 unless otherwise stated	General retail
	Current quarter (last quarter / 5yr ave)
Occupier
Availability rate (%)	3.2% (3.2%/4.0%)
Vacancy rate (%)	3.0% (2.9%/2.7%)
Rental growth (12-month growth rate)	0.3% (0.1%/-3.6%)
Quarterly take up (sqft)	3.5m sqft (3.6m/4.9m)
Supply
Completions (gross delivered sqft)	618,000 (501,000/1.7m)
Total under construction (sqft)	5.2m sqft (5.2m/8.4m)
Investment
Quarterly sales volume £m	£1.3bn (£1.2bn/£2.1bn)
Average initial yield %	6.6% (6.5%/6.3%)
Retail Warehouse October 2023 (Q2 2023) Prime to secondary	6.0% – 8.0% (5.75% – 7.75%)
Prime Town High Street yield % October 2023 (Q2 2023)	6.75% – 7.0% (6.75%)

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