Record Rents Continue for Drive Thru / To Markets

Despite the ongoing challenges of the High Street, the positive outlook for out-of-town retail remains, with record rents being set within the drive thru / to markets across the UK.

On the high street, although prime and secondary rents have remained broadly static, and are expected to continue at this level, demand within the South East region remains good, with many retailers / operators using the current market conditions to their advantage. Richard Pyne, Partner and Head of Retail Agency at SHW, says: “Local councils still need to continue working with retailers to ensure the high street remains viable and vibrant, together with diversification and intensification to ensure high footfall.”

The out-of-town retail occupier and investment market remains strong, albeit with little stock available.

Jeremy Good, Director of SHW for Out-of-Town Retail, says: “The first half of 2024 has seen the overall economic climate stabilise as inflationary pressures reduce and interest rates level, leading to an improvement in consumer confidence across the retail sectors. The General Election announcement has meant a short lead-in to a new Government and the economic indicators suggest that the traditional positive post-election bounce in the first new months of any new administration will continue to show a cautiously optimistic outlook across the Out-of-Town Retail sector.”

The sector continues to see positive sales growth in the grocery, essential, hospitality and leisure sectors although the more traditional “big box” retailers sectors including DIY, electrical and furniture operators have suffered from consumers deferring discretionary expenditure on big ticket items. The recent letting activity in the sector has continued to be focussed on the discount retailers but with increasing activity in the essential and value non-food sector has resulted in a further shift away from reliance on discretionary spend. Jeremy adds: “Along with improving sales volumes we have seen continued year-on-year growth in footfall on retail parks as the shift to convenience/essential retail continues.”

“The most active retailers over the last year have been in the discount food sector with Aldi and Lidl dominating, but with the likes of FarmFoods and The Food Warehouse continuing to acquire new stores. Whilst the traditional foodstore operators have adjusted their offer to meet this competition, it is M&S who have arguably bucked the flight to value by continuing to offer a quality food offering. As a result, they have opened a number of food-focussed stores in a variety of retail park locations and continue to show positive sales growth.”

“Away from the food retail sector the most acquisitive retailers continue to be those in the discount sphere with B&M, Home Bargains and Poundland taking most units and absorbing some of the vacancies following the failure of Wilko in August 2023. The gym operators still seem to lead the way in terms of volume of acquisitions, but it is good to see a return of the more convenience and fashion lead retailers including Superdrug, Next, JD Sports and Hobbycraft to the acquisition trail.”

The lack of supply of vacant units and continued retailer demand is beginning lead to signs of rental growth, mainly in net effective terms, through reduced incentive packages. This trend looks likely to continue. However, the lack of opportunities to secure vacant units on retail parks to re-let as part of landlord asset management programmes is preventing owners achieving the true rental value in a number of locations, including some where we are advising clients.

The drive-thru coffee shop and bakery operators continue to be the most acquisitive in the F&B sector although the volume of transactions is falling due to the difficulties in securing sites with planning consent and the increased costs of construction reducing viability. Jeremy explains: “We have continued to see new entrants into the sector with, for example, Black Sheep Coffee recently launching a drive-thru concept whilst some of the newer brands have yet to get the offer right and establish themselves fully. Activity in the family restaurant sector has slowed but we have seen examples of the drive-thru operators compromising their offer to take drive-to units where alternatives aren’t available and, in some cases, to operate as “dark kitchens” for delivery operations.”

Investment activity in the sector has remained at relatively low levels but there has been a marked adjustment in the pricing of some assets reflecting the scarcity of supply and optimistic projections of growth and retailer activity. The opportunity to buy “value add” retail parks is reducing whilst one or two larger owners have continued to try to secure dominance in the sector through volume of stock rather than necessarily focussing on quality.

Jeremy concludes: “The General Election has seen a slow-down in activity but optimism is likely to return once the outcome is clear in the early months of the new administration.”

Overall Take Up Drops by 56% Across the South East Industrial Market

In the Industrial market, take up in the first half of 2024 was down by 56% across the South East industrial market, however the outlook for the next 12 to 18 months is more positive with the political and economic climate now becoming more certain, and 3.5 million sq ft of lease events scheduled across the region, recorded on SHW’s exclusive database.

Alex Gale, SHW’s Senior Partner, comments: “The first six months of the year have shown overall take up is down, compared with H2 2023. Although the second half of the year usually records a higher level of take up, this significant decrease is reflective of the uncertainty in the market – economically and politically – which has delayed many occupiers’ decisions on property moves. However, there is a more positive outlook going forward. With a new government now in place and interest rates widely expected to decrease imminently, backed by the large number of lease events due over the next 18 months, we are expecting transactions to increase, bringing take up back to an annual average.”

In the core South London market, take up levels dropped 19%, Mid Sussex showed a drop of 85%, with Crawley & Gatwick down by 79%. There were some exceptions across the region for example with Brighton & Hove take up increasing by 212%.

Rents have remained static in most areas across the South East markets, with a couple of exceptions: Eastbourne, Hailsham & Polegate have seen achieved rents increase from £12.50 to £12.75 per sq ft; and in Hastings, St Leonards and Bexhill rents have jumped from £9 per sq ft in 2023 to £10.50 per sq ft this year.

Alex adds: “There are a raft of new Grade A, sustainable developments coming through over the next 12 months. These are in prime locations where supply of Grade A stock is low and subsequent transactions are likely to push rents to a new high.

New schemes becoming available include Phase 2 of Prologis Park Beddington (Croydon), which will provide four new units totalling 90,000 sq ft this year, and GLI’s CR1 (on site now) and CR2 totalling 107,770 sq ft in Croydon. Panattoni Park Brighton is also now available to occupy providing multi-let units from 19,5000 sq ft.

Brighton Bucks the Trend Across the South East Office Market

The first half of 2024 saw a slow take up across the South East office market after an improved 2023 However, Brighton has been an exception to this trend.

David Martin, SHW’s Head of Sussex Coast Business Space, comments: “Although the office market has slowed, there have been numerous lettings under 5,000 sq ft in all locations, which are not recorded in these Focus Report statistics.

“With Brighton telling a different story, take up is currently at 56,000 sq ft for the first half of 2024, compared with an overall take up of 87,000 sq ft in 2023. And in Croydon, there are a number of transactions bubbling away which have not yet reached completion. We expect the end of the year will show a significant increase in take up across the board.”

Most of the take up has been linked to Grade A / ‘best in class’ space due to occupiers’ quest to improve the quality of their offices, in order to give staff the best working environments they can afford. Relocations have been mainly driven by lease events and many occupiers are currently ‘considering their next move’, waiting to see what the new government will bring.

Development and Investment

Continued high build costs, planning delays and debt finance costs have impacted prices being paid for sites across the South East.

Richard Plant, SHW’s Partner and Head of Development Consultancy, comments: “Despite this, there is activity in both the residential and commercial development markets, although developers are being more selective and focussing on prime locations unless there is a significant upside on considering non-prime locations.”

In London and around the M25, demand for ‘oven ready’ sites continues to remain high for residential development, due to increasing delays in pre-applications and planning applications being processed. House prices in London and the South East appear to have stabilised, however, high build and finance costs have also impacted development activity. Well-priced unconsented sites are generating good demand, particularly in affluent towns.

In Sussex and Surrey, developers’ preference is for housing schemes with gardens over flats, however volume builders remain cautious. With the anticipated fall in interest rates following the inflationary target of 2% having been met, an increased demand for product and development is expected in the second half of 2024 as the cost of borrowing begins to ease, confidence grows and there is more political support for housing targets to be met.

For commercial property, good demand continues for prime logistics sites at sensible prices. Richard adds: “Planning risk continues to be an issue for development with delays and red tape increasing development costs and frustrating developers. But all news schemes are still aiming for EPC A / BREEAM Very Good or Excellent, due to occupier wishes and ESG requirements.”

You can see all of SHW’s commercial property listed on NovaLoca here.

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