Yields are attractive and rents are rising, but the outlook for many retail assets still depends on the local mix of infrastructure, demographics, and the ability to repurpose assets where necessary.
The pandemic and subsequent spike in borrowing costs left many property sectors reeling, but not all.
The humble British retail park has emerged as one of the hottest sectors among investors. Realty Income Corporation, a US REIT with cash flow from more than 13,000 properties, began purchasing UK and Irish retail parks earlier this year. Meanwhile, British Land, the UK's largest owner and operator of retail parks, reported that occupancy within its retail park portfolio was running at 99%, while Estimated Rental Values (ERV) were growing at a rate of 4%.
Driving demand
Part of the outperformance is down to relative value. The retail property sector has endured substantial declines in capital values – more than half since the 2015 peak, according to Green Street. Income seeking investors, particularly overseas REITS, have raised large sums at competitive costs, making well-located retail parks in the north of England yielding 7% look very attractive.
That attraction is underpinned by an outlook that has brightened significantly since the pandemic. Retail Parks were more resilient than high streets during the crisis when measured by footfall and sales. Last year Matalan said some retail parks now have three times the volume in sales of fashion goods compared with high street stores. Meanwhile, convenience is key: parking, plus the fact that it’s easy to pick up or return items purchased online have both provided a boost to footfall.
There are also structural reasons that make retail parks look like a good bet to many investors. Business rates that once impacted retail parks relative to the industrial sector were revalued in 2023 and some of that disadvantage has since eroded.
Meanwhile, many are positioned within easy reach of urban centres and are well served when it comes to infrastructure, opening up the potential to repurpose shops into warehouses or homes. John Lewis Partnership’s tie-up with abrdn to redevelop shops and warehouses into rental homes is a good example.
All of this points to a permanent shift in consumer and retailer preferences, rather than a pandemic-related investing theme that will normalise over time:
“We are sometimes asked whether the footfall and sales outperformance of retail parks is just a Covid bounce because they are open air and were perceived to be safer to visit,” British Land said in a trading update on November 14th. ”We believe it is instead a permanent structural shift driven by the three "A's" ... Affordability is driving incremental demand from discounters and essential retailers and accessibility and adaptability are key for the multichannel retailers.”
The outlook
Other retail property types share some of these tailwinds – values across the board have sunk to levels that work for some investors, for example. Consumer confidence has also remained relatively resilient despite the steep rise in borrowing costs. However, the market is highly fragmented and much depends on the characteristics of individual assets or subsectors.
Green shoots have emerged in the market for shopping centres, for example. Hammerson in March said that consumers were visiting its shopping centres less often – footfall is down about 9% compared to 2019 – but they were spending more when they did attend. Net effective rents across its portfolio were 8% above ERV in the first six months of 2023.
The West End, too, has outperformed the wider retail market, underpinned by the return of tourism and rising occupancy of offices across the district. Shaftesbury, which has £4.9 billion portfolio spanning prime West End assets, reported a 5.6% jump in rental income in the six months through June.
However, the West End is a very different prospect to most retail assets, for which the outlook will vary depending on a mix of local infrastructure, demographics and the ability to repurpose assets where necessary. So, while we expect demand for UK retail parks to continue rising, it’s still too early to call it a sector-wide turnaround.
This article first appeared in CoStar
