Low Vacancies, Tenant Demand, Rents Up: The Story Of Retail’s Best-Kept Secret

With the future of the 400-store Wilko chain on the brink, the UK’s retail landlords are braced for the possibility of another stalwart retail chain hitting the buffers.

But in the country’s booming retail park sector, even the prospect of 5.5M SF being released to the market is unlikely to see many landlords bat an eyelid, with a market often perceived as one of retail’s less glamorous enjoying soaring demand and the real prospect of rental growth. 

Out-of-town and edge-of-town retail parks are proving increasingly attractive to institutional investors because of the sector’s perceived safe haven status, growing tenant diversity and the relative lack of capital expenditure they require.

Yet even now, investor demand in 2023 does not seem to reflect the increasingly robust fundamentals that are making retail parks stand out in a recovering asset class.

Large investors have gotten on board with retail parks. The likes of the U.S.' Realty Income Corp., British Land, Columbia Threadneedle, CBRE Investment Management and Aviva Investors are in acquisition mode, and even the possible release of some or all of the store estate of on-the-brink retailer Wilko is leaving the market unperturbed.

If last-gasp attempts to save Wilko from administration fail, up to 255 retail park and shopping centre locations will become vacant, representing around 5.5M SF, according to Trevor Wood Associates. However, demand for that space is likely to be high and should be absorbed relatively easily.

“Vacancy rates are falling but mask an even more competitive situation on the ground, as 54% of the 17.9M SF of space that is currently available has been vacant for over three years, indicating it’s no longer fit for purpose,” Savills Director Sam Arrowsmith said. “If we were to remove this from calculations, the vacancy rate would fall to 2%, equating to only 8.2M SF of space currently available.” 

With net take-up in recent years averaging 4.8M SF per annum, that would imply there is less than two years’ worth of supply in the market.

“If Wilko unfortunately doesn’t survive, we therefore anticipate plenty of suitors will compete to secure its vacated space,” he added.

Trevor Wood Associates estimated that national vacancy rates are around 5.4%, with East Anglia the lowest at 3.4% and Yorkshire and Humberside the highest at 7.1%. The south-east is below the national average at 4.8%.

Figures across all regions of the country are below the same period in 2022, when the average vacancy rate stood at 6.8%. In addition, Trevor Wood stressed in its analysis that numerous deals currently transacting should see the figures trend down further.

“Looking at the third quarter 2023 there are a considerable number of units under offer or with plans to redevelop so with that in mind, we do believe the vacancy rate will continue to fall,” the company said.

Among the investment giants, British Land has been particularly active, completing the acquisition of three retail parks for a total of £94M and selling its 50% stake in a retail park in Preston for £30M.

British Land described retail parks as a “winning format” in a July trading update as it announced 227K SF of leasing deals across retail parks, 13.5% ahead of estimated rental value, with a further 738K SF under offer, 17.7% ahead of ERV.

In addition, it completed 109K SF of renewals and extensions, including DFS, Sofology and Asda, with occupancy across its estate at 99%, footfall up 1% year-on-year and sales up 6%. It also renewed and extended deals with sofa companies DFS and Sofology at Teeside Park and with Asda at Crown Wharf shopping park, Walsall and Prospect Place Retail Park, Dartford. 

The largest acquisition was Capitol Retail and Leisure Park in Preston for £51.5M, at a net initial yield of 8.43%. The 300K SF park is let to retailers including Next, Home Bargains and Boots.

“In the aftermath of Covid-19, retailers that have established more resilient business models with a successful omnichannel strategy are performing well and increasingly looking to take space on retail parks," British Land Head of Asset Management (Retail Parks) Matthew Reed told Bisnow. "The format appeals to a wide range of retailers from Marks & Spencer and Next to value retailers such as Lidl, Aldi and B&M.

“Across the market, retailers are also facing higher costs and margin pressures. To help manage this and stimulate more impulse purchases to increase the average basket size, more are incentivising shoppers to complete fulfilment in-store, which is the most cost-effective solution. This, combined with lower occupancy costs, plays well to the retail park proposition.”

Other notable institutional deals so far this year include the Aviva acquisition of two retail assets in the south of England: Hedge End Retail Park in Southampton, acquired from clients of CBRE Investment Management, and an Asda superstore in Hayes. 

Increasingly active U.S. investor Realty Income bought Bristol's 300K SF Imperial Retail Park as part of a £175M deal. The 350K SF retail and leisure scheme is anchored by B&Q, The Range, M&S, Next and Boots.

It also acquired a second scheme, Fife Central Retail Park in Kirkcaldy, which covers 325K SF and includes tenants such as B&Q, Sainsbury’s, M&S and Next.

LCP, part of M Core, took ownership of the Alexandra Retail Park, Grimsby. The 125.7K SF retail park comprises eight units, with tenants Matalan, SCS, The Food Warehouse, My Energi Ltd., Argos, Pets at Home and Poundstretcher.

M Core has invested more than £160M over 12 months in 25 retail centres and has said that it has £300M available to invest for assets ranging from £500K to £30M and portfolios up to £150M.

Meanwhile, DTZ Investors completed the purchase of Purley Cross Retail Park in Croydon for £59M, or a circa 5.35% net initial yield, from Oval Real Estate.  AshbyCapital, the property investment management company, has refinanced two of its retail parks with a three-year, £50M loan facility provided by incumbent lender Deutsche Hypo.

Westside Shopping in Guiseley, West Yorkshire, comprises 120K SF of retail space across 13 retail units, while Morfa Shopping offers 345K SF of retail, leisure and parking in a prime location next to the Liberty Stadium, home to Swansea City Football Club and the Ospreys rugby team. 

However, despite robust occupier demand, Savills described the retail warehouse investment market as in a “state of flux” in its latest report, with prime open-A1 yields starting the year at 5.5%, with a spring low of 5.25% and a summer high of around 5.75%. Similarly, prime restricted yields reached circa 6.25% in August, 25 basis points higher than in January, having dipped as low as 5.75% in the spring.

Retailer performance has been strong for many key operators, particularly the discounters, with Aldi and Costco among those to have announced expansion plans on retail parks.

“As a result, we have seen no significant reduction in the average net effective rents achieved, which remain at circa £18 per SF, as they have done for the last two to three years,” Arrowsmith said.

However, despite the strong occupancy story and a number of headline deals first-half retail warehouse transactions of £1.1B were down 13.5% on H2 2022, 17.9% down on the same period last year and 14.6% below the H1 average of the last two decades, according to Savills. 

“It is our view that investors are simply not putting enough weight on the bedrock that underpins the occupational market,” Arrowsmith said. “We have arguably been at this juncture before, with the relative naivety of some investors in tarring all types of retail with the same brush.”

Essential retailers, including discount grocers and value home goods brands, have continued to lead the number of new store openings, accounting for 94, or 19%, of total new unit openings in H1, equating to 39% of additional floorspace, according to Savills. There were 510 new unit openings recorded in H1, putting the market in place to exceed the long-term full-year average of 843 new openings.    

Savills added that continued appetite for store expansion is driving down voids in the sector, with vacancy falling from 4.8% in January to 4.4% in July following a peak of 6.1% in 2021. 

CBRE UK Head of Out of Town Retail Martin Supple said that during the pandemic, many occupiers were largely able to remain trading, creating a reconnection with customers that has been retained, while investors have noted the resilience in terms of rent payments. 

“With the broad categories of retailers now on retail parks, I think there has been a flow through to the investor base,” Supple said. “So certainly investor confidence has widened and deepened post-pandemic because people are connecting back to the fundamentals, the retailer performance, the income resilience and the asset base underneath for well-located, reversionary sites.” 

He pointed to an active food sector, with Lidl and Aldi increasingly turning to retail parks because of the difficulty of finding town centre locations, while the larger-format Iceland Food Warehouse and Marks & Spencer have also been active.

“What it shows is that retail parks are not just about discount grocery stores. It’s much broader than that,” Supple said.

Also among those looking to acquire sites are Home Bargains, B&M, The Range, DIY chains B&Q and Wickes, Dunelm and athleisure brands such as JD Sports, Frasers, Sports Direct and Nike.

“This diversity of tenants, plus the increasing presence of F&B pods for the likes of Burger King, Starbucks and KFC, plus new players like Tim Hortons and Popeyes, means that demand is extremely robust,” Supple added. “These types of offers also increase dwell time and boost footfall throughout the day at parks.”

He said the range of operators looking to retail park locations is set to increase further, citing more outdoor leisure operators such as We Are Paddle and Rock Up that are extending gym offers, plus more dentists and opticians and other health services, where the operators are attracted by the convenience and free parking.

While occupational resilience has not been enough to persuade all investors, 2023 has continued to see transactional activity, especially in the smaller lot sizes, and Savills anticipated transactional activity in the sector will increase over the next 12 months, focused on core-plus assets for institutional investors and secondary assets for opportunistic buyers. 

And rental stability could turn to rental growth, according to Supple.

“High construction costs and debt rates mean there is little new development, so we have low vacancy rates and a captive market, which should mean an uptick in rents across the sector,” he said.