Alasdair Steele, Head of Scotland Commercial at Knight Frank, reports on the increasing investor demand for retail parks and how they have recorded strong footfall numbers in 2017:
A wet summer tends to be bad for consumer spending. But, it’s turned out to be good news for a particular kind of shopping: retail parks. Figures from retail intelligence firm, Springboard, from July into August this year show a clean sweep of annual increases for footfall at retail parks, ranging from 1.06% during the week beginning July 3, to 2.61% in the week of July 31.
These statistics are just a few examples of what’s turned out to be a strong 2017 for retail parks – the picture has been almost entirely positive, after a few blips earlier in the year. While the number of shoppers at most other destinations appears to be in perpetual decline, the trend seems to be heading the other way on retail parks – and for good reasons.
Firstly, because they provide convenience: retail parks tend to offer accessible parking and involve less window shopping. Their shops also tend to be ideal for click-and-collect services – think Halfords – which has seen them fare much better than the high street against the growing preference for online shopping.
Their popularity with shoppers is reflected in the property world too. In Scotland, we’ve seen a number of retail parks change hands recently. Among them were parks in Linlithgow and Livingston, both sold to private buyers. At the time of writing, another two significant retail parks are under offer in Scotland – with a total value of in excess of £100 million – while Columbia Threadneedle Investments has just bought Gala Water Retail Park in Galashiels.
There hasn’t always been this level of exuberance for these assets among investors, though. After the crash of 2008, there was consolidation among the businesses they tended to attract, and, as a direct consequence, there was a real lack of tenant demand. The general downturn in retail exacerbated the situation, with vacancy rates hitting 11.8% in 2009. Many were nervous about the sector’s prospects and concerned that rental levels were unsustainable.
However, a new generation of parks is now springing up, populated by a new type of tenant. Visit many of them across the country and the names are likely to be similar: you’ll usually find a B&M or a Home Bargains, an Aldi or a Lidl, and other operators such as M&S Simply Food, Pets at Home, and Iceland’s Food Warehouse are looking to increase their store numbers across Scotland.
Not only are these well-operated companies more or less ubiquitous on retail parks, but their leases share common traits. They tend to offer long lease terms to good covenants, solid rental growth via some form of index-linked review clause, and the yields on offer are attractive in comparison to other sectors of the market. Another advantage is the lower upkeep costs required for the buildings themselves, compared to other types of property assets such as offices and high street retail.
The rise of these businesses seems inexorable. Lidl announced plans for 60 new shops across the UK earlier this year, B&M upped its target number of stores from 850 to 950, and M&S’s food business continues to boom. This demand for space will see more of this new generation of retail park coming into being, albeit planning restrictions will mean it will never be a flood.
We expect this area of the market to increase in popularity among investors. At a time when income returns are key, there aren’t many other sectors that offer the same combination of secure income and strong tenants at the yields offered by retail warehousing.