Robust investment interest in retail, despite sluggish economic outlook – Knight Frank
Although the numerous recent retail failures will push up national vacancy rates even further and put even more downward pressure on retail rental values, there is renewed interest among property investors in retail property – and aggressive bidding for the best retail premises available within the portfolios of those businesses that have gone into administration.
Knight Frank’s most recent retail research concludes that retail investment will remain robust, despite the sluggish economic outlook. Last year was good for Central London retail, and also for much of the wider South East retail market, says Knight Frank, thanks to “a unique series of events which brought a global focus to the capital, where a seemingly endless queue of domestic and international retailers continues to open stores.” Elsewhere in the UK, it says, larger regional cities and shopping centres have performed well, but many smaller/weaker towns have suffered from high vacancy rates and falling rents as retail spending has moved to more attractive retail destinations – not to mention the internet.
“We expect to see further polarisation of both high streets and shopping centres between the regionally dominant and sub-prime locations,” the firm adds. This is not only driven by the continued growth of online shopping, but also by the lack of appetite from fashion retailers in particular for more secondary stock. Landlords in such locations need to adopt a flexible approach to leasing “in order to act as a catalyst for increasing tenant demand and helping to redress the balance with the larger competing centres,” Knight Frank says.
Retail development is expected to remain well down on its peak of 2008, the firm says, but it notes an increasing number of new proposals in the shopping centre and retail warehouse markets. Last year there was only one new opening– the Swan Centre in Yardley – but so far this year there are five shopping centres in the pipeline. “A strong leisure and catering component is becoming an increasingly important part of the retail mix,” Knight Frank adds. Restaurants now frequently account for 20% or more of a scheme’s units, it points out.
Investors in the market for retail property are looking for prime locations with solid tenant line-ups and areas of undersupply, the firm says. The shopping-centre investment market has got off to a good start this year, with numerous exchanges and likely completions in coming weeks. Knight Frank expects investors demand to remain robust for prime shopping centres and leisure property, and says that sentiment is improving for good secondary stock with asset management opportunities.
“Market pricing allows investors to choose their risk profile and we are noticing a slightly increased availability of debt,” says Bruce Nutman, partner, head of retail investment at Knight Frank.
The latter part of 2012 and the start of 2013 has seen the return of the REITs to the market, says Andrew McGregor, partner, head of leisure and out-of-town at Knight Frank. “Most of the REITs, given their development exposure, have a pressing need to generate safe and secure income to prop up dividend payments to shareholders,” he adds. “Whether income in this sector can be regarded as ‘safe and secure’ is debatable,” he says, “but as ever, it all depends upon good stock pricing.”
