Latest research from Colliers International reveals that despite economic and political uncertainty, the retail warehousing market continues to show resilience, attracting a wealth of both overseas and UK investors. Boasting attractive yields and returns, the sector is set to record the highest overall volume of sales in the retail investment market in 2017.
The report also reveals that investors, especially traditional UK institutions, are increasingly seeking prime retail warehouse opportunities as they are viewed as the most secure and arguably ‘safe’ assets to invest their capital in. This strategy, partly driven by an increasingly uncertain economic outlook, has seen the gap to peak market pricing narrow further.
Tom Edson, Head of Out-of-Town Retail Investment at Colliers International commented: “Pricing for retail warehousing has contracted and yields have fallen. Investors are seeking the best assets, with the lowest risk profile, as they seek to protect capital.”
Following a spike in activity in 2015, when investment volumes exceeded £5 billion, the number of transactions is returning to pre-peak levels. As of November 2017, investment values are in excess of £2.2 billion, on top of many significant deals which have not been publicly marketed.
“Recent noteworthy transactions that indicate the sector’s return to health include Surrey County Council’s acquisition of Malvern Shopping Park for £75 million and Hampshire County Council’s acquisition of Mallard Retail Park from TH Real Estate for £47 million. Local Authorities continue to invest in parks to generate revenue for local services, and although these new requirements are generally for smaller lot sizes, these deals show that some councils do have capacity for larger assets, not always near or close to their own borough” explains Edson.
Examples of UK institutions opting to invest in this asset class include; the sale of the Mid Sussex Retail Park to DTZIM for £17.3 million reflecting a Net Initial Yield of 4.71%. The property comprises 54,420 sq ft and is let to B&Q and Pets at Home. Another noteworthy deal was the acquisition of Pipps Hill Retail Park in Basildon by Royal London. The 220,000 sq ft park anchored by Asda, B&Q, Wren Kitchens and T K Maxx was acquired for £86.5 million, reflecting a Net Initial Yield of 5.62%.
Edson continues: “As a consequence of the positive sentiment in the retail warehouse sector we are seeing a number of new investors enter the market – some from overseas – acquiring assets with a view to renovate, to get an edge on the yield.
“In terms of performance, there are also investment opportunities in the secondary market, where improved performance can be unlocked via intensive asset management initiatives, which combined with a potential edge on yield is drawing a number of new investors – some from overseas – to enter the sector.”
Occupational market highlights:
Nick Turk, Director, Colliers International, comments: “There are the lowest vacancy rates on retail parks in nearly 20 years, with most empty units being filled quickly. The level of vacancy on retail parks is lower than other retail assets despite the rationalisation and administration of several high profile retailers over recent years.
“In addition, the out-of-town offer has evolved from white goods and electronics to leisure, fashion and new DIY concepts. Half of all retail parks now contain leisure and F&B, and the ongoing roll out of the Bunnings portfolio is set to bring a fresh, new approach to conventional bricks and mortar DIY stores. The number of discount grocery stores anchoring out-of-town schemes has also increased by 78 per cent in the last six years.”
Additional general highlights:
Retail parks continue to have the biggest footfall increases year-on-year, with concerted growth since 2013, and seven months of consecutive footfall growth since March 2017. Good accessibility, free parking and convenient Click & Collect points continue to drive shoppers to retail parks, whilst shopping centres and high streets have witnessed declining footfall.
There is strong intent amongst developers for new schemes, but finding the right locations that are attractive to tenants is challenging. There has been a sharp increase in the number of planning applications submitted for new out-of-town retail schemes since 2013, although it is likely that only one in five of these will be developed.
Mark Charlton, Head of UK Research and Forecasting at Colliers International comments:
Continued urbanisation and more attractive residential land values pose a threat for retail warehouses within the M25. Retail parks within London are under a growing threat from residential redevelopment. More mixed-use developments are expected in the future, due to the pressures of urbanisation and high land values.
Driverless cars pose a potential threat to retail warehousing if active asset management is not undertaken. The beneficial aspects of out-of-town parks such as convenience and free parking become less significant with the introduction of driverless cars. Active asset management will be necessary to create distinctive and quality destinations that are future-proofed.
Out-of-town supermarkets will become the new ‘department’ stores. Next is the latest retailer to open a supermarket concession, taking space in a large London Tesco store (Arcadia, Dixons, Carphone Warehouse and Holland & Barrett have already been introduced within Tesco, while Sainsbury’s has begun the roll out of Argos and Habitat concessions).
Renting out space to third party brands enables supermarkets to utilise excess capacity and the additional income provides some relief against business rate increases and the absorption of food price inflation. The merging of grocery with different types of retail brands also encourages non-food visits to supermarket and can boost well times.