As 2014 draws to a close, we can now safely say it was the year that investor confidence returned to the retail property sector.
Last year was characterised by opportunistic investors picking up what they saw as bargains, as uncertainty caused by the growth of online shopping continued to surround retail property.
This year, from shopping centres to the high street to superstores, investor confidence has returned as it has become clear that of the many ways to shop most of them involve good old-fashioned stores.
The upshot is that according to IPD figures for the quarter ending September 30, retail property saw returns of 14.6% over one year and 11.9% over three years. This doesn’t match the 20%-plus returns seen by office and industrial property, but defies the doom that has surrounded retail property.
Investment volumes are also on the rise: according to PropertyData, £13bn of retail property had been traded by October 24 this year at an average yield of 6.15%, compared with £14.3bn for the whole of 2013 at an average yield of 6.3%.
With the fourth quarter traditionally the most active, it is clear that retail property sales will surpass those of last year. And there is resurgent demand for large prime assets outside London.
Occupationally, things are improving too. Particularly interesting is the 0.7% increase in footfall at shopping parks, reported by Experian. One reason for this is click & collect, which for many shoppers has become a way of life. It is easy for someone to go to Waitrose to pick up a £25 John Lewis order and leave having spent another £50 in Waitrose itself. Retail analyst Verdict is now predicting that click & collect will grow by 122% to £6.5bn by 2019, and it now accounts for 30% of John Lewis’s online sales.
Click & collect is fuelling a strong pick-up in consumer activity. Our exit surveys for the six months to September show dwell times up 5%, footfall up 2.6% to 340 million visitors and average spend up 12% - translating into retail sales up 4.4% in the same time.
So how do investors differentiate between different types of retail property now?
UK institutions are seeking income and 5%-6% shopping centre yields compare well with negligible returns from money in the bank. Only now, with the signs that we are now back on the road to rental growth, there is the prospect of 1%-3% extra income in the medium term.
Sovereign wealth funds are on the hunt for trophies - hence Chinese investors’ appetite for assets like Fosse Park, which was bought by a sovereign wealth fund in partnership with The Crown Estate for £345.5m in August.
And superstores? Despite the food retail sector’s travails, they retain their appeal to overseas funds and UK pension funds, with British Land having sold £232m of gross assets since March. Where there are four 100,000 sq ft stores in one location they may struggle, but in a town where there is one 100,000 sq ft store the investment dynamics are strong.
The best shopping parks are also performing strongly, but it is vital to tailor these assets to meet the needs of a more discerning shopper and the growth of click & collect. Our shopping parks provide large stores with flexible layouts and room for storage; they have lots of free parking and are easy to get to.
Improving the mix is also crucial to that, and last month at Fort Kinnaird, our Hercules Unit Trust’s joint venture with The Crown Estate, we announced that eight new brands would be moving in. These include a 40,100 sq ft Primark, TK Maxx/HomeSense, Fat Face, Simply Be/Jacamo, Five Guys, Ed’s Easy Diner and Caffè Nero.
Along with Pizza Express, Nando’s, Frankie & Benny’s, TGI Friday’s and a seven-screen Odeon cinema, the leisure occupiers that have signed will combine to ensure that a £13m leisure extension will open in spring 2015 fully let.
My Christmas wish? Continuing consumer confidence that encourages property investors to pick up where they left off in January 2015, after a year in which retail property bounced back.
Charles Maudsley is head of retail and leisure at British Land