Although leasing activity in the out-of-town retail occupational market is down compared to the peak in 2007, the market continues to show some resilience according to Cushman & Wakefield’s latest ‘Out-of-town Retail Snapshot’ report.
In locations where supply and demand are evenly matched, there are pockets of rental growth but generally three common themes are apparent in the occupational market; increasing trading polarization: an increased need for retailers to address operational inefficiencies: and tenant incentive packages with more flexible lease terms.
Prime open A1 non-food sector
This sector is performing strongest, with lower vacancy rates than the bulky goods sector. Many of the higher rented schemes continue to generate good levels of trading turnover, underpinned by good accessibility, a quality shopping environment and diverse tenant mix. These locations are still favoured by retailers, but only when they can occupy space on an economically sustainable basis.
Bulky goods sector
The bulky goods sector is facing more challenges, with pressure on retailers to address the impact of past operational requirements – primarily excessive floorspace, reduced consumer spending and a shift in shopping patterns, which has translated into higher online purchases. Dixons Retail represents a good example of this, with its consolidation programme to create ‘2in1’ trading format stores, incorporating both PC World and Currys fascias, proving extremely successful in addressing what can be considered as operational inefficiencies.
There is no quick solution for the market where over-supply exists. However, the rationalisation programmes being implemented by some retailers, alongside receiverships and CVAs, continue to provide
excellent expansion opportunities for others. For example, B&Q and Wickes acquired 42 former Focus
stores in 2011, allowing them to widen their geographic reach into some smaller towns and absorb market share in a sector of only three national DIY operators. Encouragingly, those retailers who continue to target new store openings, including both Dunelm and DFS, are seeking strong trading locations and economic rents as their core requirements behind the acquisitions.
‘New wave’ of retailers
While the ‘old guard’ retailers have to wrestle with the issues of maturity, we are witnessing a new wave of operators pushing for space. B&M and Family Bargains are actively securing larger units, and single price point retailers such as Poundland and Poundworld/Discount UK were also very active in 2011 – albeit their expansions have slowed slightly during the first and second quarter of this year. Hobbycraft continues to expand with plans for 80 new stores in the next five years. In terms of newcomers, Metro Bank has opened its first retail park unit at Borehamwood Shopping Park with further stores set to open in the M25, while Nike is also expected to enter the retail park sector later this year.
Outlook for the rest of 2012:
Occupational
Despite a mixed outlook for the rest of 2012, the occupier market is expected to remain stable if subdued. Nationally, demand for prime will be sustained, but some secondary schemes will come under pressure.
Martin Mahmuti, Analyst in the European Research Group at Cushman & Wakefield, said, “Notwithstanding challenging trading conditions, occupier activity is not expected to stagnate. Retailers remain particularly cost-sensitive, and the shift to cheaper out-of-town locations is not likely to end in the short term. A number of retailers are looking to trial new formats and expand their multi-channel provision. The success of ‘click and collect’ is expected to draw new retailers to the out-of-town market.”
Development
Construction of new out-of-town stock is expected to continue at its present low levels into 2013, with new activity likely to be focused on capturing unsatisfied demand from the ‘Home’ concepts of the likes of John Lewis and Next. The current planning regime appears slanted towards assisting regeneration, and in areas of under-supply there is a strong argument to support the development of retail warehouse space.
Investment
The investment market picture remains mixed as whilst selective demand appears likely to remain for secure income opportunities and dominant schemes in under-supplied locations, moving forward clear transactional evidence will be key in generating increased deals flow. Non-food transaction volumes to late May this year stood at approximately £270m, comprising 14 deals. When compared with almost £1.1bn in
54 deals transacted in the first five months of 2011, it reflects a turnover decline of approximately 76% year-on-year.
It is anticipated that the low level of transaction volumes will continue in the short term as valuations realign, but expectations are that there will be little near term evidence of prime pricing. Assets perceived to be further up the risk curve appear set to remain the focus of more opportunistic investors; consequently, the gap between prime and secondary is expected to widen slightly as the year progresses.