The Colliers Midsummer Retail Report 2014 makes for positive reading. Across all the retail sectors there is good news, especially in demand for prime assets, whether high street, shopping centre, supermarket or retail parks. The leisure market is also seeing a return to good health.
While there is good news aplenty, there is still room for caution, as the retail and leisure sectors are slowly coming up for air after the recession. The next few pages gives a snapshot of the report, which was launched on Thursday.
Investment
James Watson, head of retail investment, Colliers International
• Yield compression across all retail property sectors
• New supply of debt finance combining with overseas investment to fuel market
• Shopping centre investment in 2013 up 65% year-on-year to £4.25bn
• Supermarket investment in 2013 totalled £1.8bn – a 50% increase on 2012
• UK institutions and REITs sustained buyers of retail parks and prime high street assets
• Troubled outlook for some secondary centres and non-prime assets
• Fears that market may overheat because yield compression is not coupled to rental growth/occupier demand
High street
The buying of prime high street assets remains almost the exclusive preserve of UK institutions and some high-net-worth individuals. Investment is focused primarily on the affluent “cathedral cities/market towns”.
Clearly, many secondary and tertiary high street locations are still facing the challenges provided by an over-provision of shopping and the scaled-back sizes of both existing store chains and the planned networks of the emergent retailers.
Beyond the prime sector, there may be opportunities for the active asset manager who is prepared to buy in at a sizeable initial yield and explore future possibilities for assets that may include conversion or a change of use.
Shopping centres
The global stampede to secure yield across all asset classes is resulting in a huge influx of capital into UK shopping centre assets.
Transaction volumes reached a six-year high during 2013 as investor demand outstripped supply and presented a stable platform on which to sell. Excess demand has resulted in yield compression across all centre types, which began to emerge during the second half of 2013.
Transactions during the first quarter of 2014 reached £1.28bn, which was ahead of the same period last year – and would have been far greater save for constrained supply. A large number of assets traded in Q1 were legacy deals seeded in 2013 or were conducted off-market. Consequently investor demand remains undiluted.
Supply remains exceptionally tight: towards the end of H1 2014, £1.58bn of deals had unconditionally exchanged contracts and a further £780m was under offer. A weight of bank-led disposals means there is more than £1bn of stock currently on the market, which will generate a spike in transactions during Q4.
Leisure
We have seen a notable increase in leisure investment activity over the past 12 months, in line with the wider property market, as the economy has continued to recover and build momentum.
Approximately £675m was transacted in 2013, showing a 50% increase by way of volume (excluding the corporate acquisition by Land Securities of a further stake in the X-Leisure Unit Trust), compared with 2012 volumes of about £450m. Of that £675m, 65% was acquired by UK institutions, 15% by UK REITs and 20% by property companies and private investors.
Investor demand for the leisure sector is as diverse as ever, with a large pool of institutional and non-institutional investors seeking access to the marketplace.
The market is being driven by increased occupational demand (particularly from hotels, cinemas and restaurants), long leases with index-linked rent reviews, rental growth prospects and – importantly – a general perception of the sector’s resilience to the internet. Coupled with this is a limited supply of product.
Supermarkets
This is not a sector where it pays to take a blanket approach. While it remains a fundamentally profitable business sector, with substantial property investment opportunities, each of the major operators is facing different challenges.
However, the scale of the supermarket operators and the affordability of property rent for those businesses means there is sound base from which this asset class can proceed.
Over the past 10 years supermarkets have recorded value increases of 5.6% year on year, whereas standard retail capital has grown by only 0.5% year on year.
Out-of-town retail
UK institutions and REITs are the principal buyers of out-of-town retail parks. Generally, the size of the assets and their yield profile suits the strategic aims of these buyers. Overseas investors are yet to target the sector with any real intent.
The sector has seen substantial yield compression, as shown by deals in Q4 and 2013 and Q1 2014. For instance, 2013 saw £2.5bn of retail warehousing transacted; in 2012 it was £1.5bn.
Given that most of this asset type is held by UK institutions, there is a dwindling supply of quality properties for sale because the funds are focused on getting money into the market.
Rents
Mark Charlton, head of research and forecasting, Colliers International
• Yield compression across all retail property sectors.
• Four UK regions witnessed rental growth over the past 12 months: central London (11.6%), outer London (4.1%), East Midlands (2.7%) and Yorkshire & Humberside (0.4%). This is the first time rental growth has been witnessed outside of London since 2008.
• Central London recorded its strongest year for rental growth since 1998. In contrast, Wales has witnessed its worst performance since 2009.
• All regions, with the exception of Wales, improved rental performance in 2013.
Worst three performing regions in terms of rental growth are:
• Wales: -9.3%
• South West: -3.1%
• West Midlands: -2.3%
Rental growth/decline
Five of the top six performing locations are in central London:
• Jermyn Street: 58%
• South Molton Street: 50%
• Coventry Street: 34%
• Dover Street: 33%
• Stourbridge: 33%
• Covent Garden Market: 31%
Three of the bottom four performing locations are in Wales:
• Newport: -45%
• Port Talbot: -43%
• Llanelli: -38%
• Kidderminster: -27%
• Tamworth: -27%
London
Paul Souber, head of central London retail agency, Colliers International
The capital’s retail property market has been riding the crest of a wave, but is it in danger of being swamped by new development?
An influx of international retailers, a growing population and increased tourist spending have all supercharged London’s retail property scene in the past years.
There are now 1m more people living in London than there were 10 years ago and the population is forecast to rise by the same amount during the next decade.
• The capital’s market forges ahead after “good recession”.
• By 2025, the population will have increased by more than 2m people in two decades.
• Demand “ripple effect” is opening up new shopping pitches across London.
• London’s status as gateway city to European expansion is attracting international retailers.
• Huge raft of development projects planned for in and around the capital.
• Will there be enough retailers and shoppers for these new schemes?
The scope for London radically to increase its shopping scene is clear, and developers have been quick to react. Among the projects that are set to change the retail landscape in London are:
• King’s Cross: 500,000 sq ft of retail
• Westfield London Phase II: 550,000 sq ft extension
• Battersea Power Station: 1.5m sq ft of retail and leisure
• Brent Cross: 592,000 sq ft extension of what was London’s first major shopping centre
• Earls Court & Olympia: 77-acre development encompassing four new “villages”
Leases
Dan Simms, head of retail agency – south, Colliers International
• From late 2008, the insertion of tenant break clauses – a clean and definite exit point from liabilities – into new leases became a “must have” for many retailers. Although the long-term trend for break clauses had, prior to 2008, seen them feature in no more than 15-20% of leases, the recession completely changed this.
• Incentives in the North have been the highest of the three regions for each of the past five years. Overall, the average level of incentives has receded from the peak in 2011, and stood at 8.8 months during 2013.
