Sunita Chawla appraises the current state of the retail property market.
Like other sectors, retail is impacted by the macro and geopolitical landscape. Although the mantra last year was “survive until 2025”, there was a cautious start to this year with the UK five-year interest swap rate above 4% and the 10-year gilt yield reaching its highest level since 2008. This was heightened by fears of increasing inflation as a result of US president Donald Trump’s proposed tariffs on imports.
In the retail sector, the government’s November Budget hit the retail sector hard, with increases in National Insurance and the National Living Wage and a reduction in business rates relief, which all come into effect in April this year resulting in increased costs for retailers. There will undoubtedly be some casualties as a result, in particular among the smaller and independent retailers. The larger retailers should weather this storm and we may see retailers revisiting their expansion plans or ultimately passing costs on to the consumer.
However, it is not all doom and gloom for the retail market. Commentators have consistently said that the UK hit the bottom of the real estate market in 2024. That appears to be evident in the retail property market, which is now seeing steady signs of recovery. The retail property market was a focal point of last year’s Mapic conference with an optimistic view of the resilience of retail as an asset class.
Reasons for optimism
The effective asset management of retail assets is helping to tackle voids with vacant department store space being creatively used for alternative uses such as competitive socialising like golf and darts, as well as new leisure activities like go-karting, all designed to create more of a destination. This, coupled with the continued competition for space in prime locations, is driving down vacancy rates, with positive signs of rental growth emerging.
From a retail investment perspective, investment volumes were down last year, but pricing appears to have stabilised and there is renewed positivity in the sector. Data from BPCE Solutions Immobilières, presented at an investor sentiment panel at Mapic, showed that the UK retail real estate investment market reached almost £4bn last year, the highest among all European countries.
Retail parks are still the most attractive assets for investors. Last year, RICS reported that the average rental values in the retail warehouse subsector had risen by 1.6% in the 12 months to September 2024, the highest rate of rental growth since 2007.
There was also an increased appetite for strong-performing shopping centres in 2024, with RICS reporting that average rents in shopping centres had risen by 0.8% in the three months to September 2024, although the annual figure was still down by 0.4%.
What is the commercial appeal of buying up shopping centres?
High performing shopping centres benefiting from good asset management, innovative use of void space, and the combination of leisure and hospitality are returning stability to the retail market.
Shopping centres essentially fall into two categories: those at the top end of the market, which are again attracting investment from institutions and quoted property companies, such as Landsec’s recent acquisition of a 92% stake in Liverpool One at a 7.5% yield; and those that are ripe for repurposing and redevelopment.
Lambert Smith Hampton recently reported on the shift in shopping centre ownership, with 60% of the top 500 largest centres now being owned by private owners and local authorities instead of the property companies and pension funds of old. It also found that more than half of the UK’s shopping centres require either large-scale repurposing or complete replacement.
Repurposing does create opportunities for investors, especially in mixed-use developments where the inclusion of hospitality, residential and cultural benefits can enhance the offering to both retailers and consumers.
As shopping centres are usually under single ownership, owners can deliver a more holistic development strategy, which is easier compared to urban high streets that can be in multiple ownership with competing interests, making strategic development decisions more difficult.
How can retailers modify their spaces to attract customers and change their experience?
What has become increasingly apparent over the last year is that there is more of a focus on physical location, with experiential retail and destination retail at the forefront, driving retail footprints. Consumer spending is still constrained so retailers need to be smarter to attract footfall and this has necessitated a revamp of retailers’ real estate strategies.
Retailers are becoming more innovative about their refits and expansions. Some retailers use bricks and mortar stores as showrooms for their online stores and digital integration to give customers a seamless, omnichannel experience, with special promotions, pop ups and exclusive products to lure shoppers.
Shopping centre owners can accommodate retailers to expand and diversify their offering when vacancies arise or where there is a careful curation of retail units or utilisation of vacant or surplus space. Owners can also capitalise on re-engineering tenant location and tenant mix to create a destination through the integration of retail with leisure and hospitality which increases footfall both to the individual retailers and to the shopping centre as a whole.
Is the retail market reviving outside the UK? If so, why?
Like the UK, the overall global retail real estate market is experiencing early stages of recovery. According to CBRE’s European Real Estate Market Outlook 2025, the firm is predicting a rise in real estate investment with a strengthening occupier market and increased leasing activity, resulting in a resurgence in prime shopping centre transactions with increasingly more attractive returns.
It has been reported that European retail investment reached €19bn (£15.9bn) over the first three quarters of 2024, a 6% increase year-on-year. Although data from BPCE Solutions Immobilieres found that “retail investment across Europe declined by 10% year-on-year”, retail was the most resilient asset class compared to the office and logistics sectors.
The divergence in the attractiveness of the prime retail market and the secondary and tertiary markets will also play out in Europe with the gap widening and the possibility of more distressed assets entering the market.
What trends should we expect for the commercial retail property investment market in 2025?
The retail market is evolving and reinventing itself, but, ultimately, only the fittest will survive. Top brands with attractive concepts that involve enhanced customer experience will be the trends going forward. Retailers will need to embrace artificial intelligence for customer engagement and operational efficiency and adapt to a more omnichannel approach to retailing, transforming bricks and mortar stores into media platforms.
Real estate investors are looking at retail assets on an individual and country basis with determining investment factors including size, capital and operational expenditure and the required level of asset management to be deployed.
Prime assets will continue to drive the most investment activity and we may see a widening of the divergence between prime and secondary retail assets.
Sunita Chawla is a partner at BCLP
