Retail and Leisure spotlight
Spring 2022
Occupational Themes
Resilience of the occupational market shown in 2021 to continue into 2022
Retailers continue
to adopt
‘new format stores’
Footfall growth vs average weekly instore retail spend (including food)
Investment MARKET
Impressive year for retail warehouse investment demonstrating the sector’s resilience
2021 delivered impressive transactional activity for the
non-food retail warehouse sector despite enforced Government lockdown and a limited amount of new retail warehouse stock being brought to the market early in
the year.
2021 transactional volumes of c.£3.77bn represented the
2nd largest annual level of investment in the last 10 years.
Increased investor confidence demonstrated by the return
to multi-let assets including some of the largest single asset transactions seen in recent years.
Demand for retail warehouses has led to sharp yield compression across the sector in 2021. Liquidity has
returned to almost all subsectors of this market.
Crystal Balls and Investment Volumes
2021 has been a significant year for retail warehouses, with the key theme having been their evidential resilience.
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The sector has seen unprecedented levels of investment demand since the twin hurricanes of Brexit and Covid-19 bit into investor confidence. With evidence of ERVs stabilising this demand has ultimately led to strong yield compression across the sector, despite the ongoing uncertainty during the multiple waves of the pandemic.
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Following a strong end to the year in Q4 2021, which saw c.£1.02bn of transactions, 2021 annual investment volumes totalled an impressive c.£3.77 billion across 180 transactions, which is more than double (+106%) the full year total volumes in 2020 of c.£1.83 billion (101 deals).
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Buyers – no one saw this coming
An interesting story in 2021 lies in the buy-side; the 5 largest acquirers of retail warehouses, being Realty Income, M7 Real Estate, Columbia Threadneedle, Brookfield and British Land, were considerable lengths ahead of the deep buyer pool that comprised the rest of the market.
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It comes as less of a surprise to see M7 Real Estate and Columbia Threadneedle on the list, as both were active investors in 2020. Nor Brookfield, given much of their volume came from the timely acquisition of the £330m Hammerson Portfolio.
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British Land, however, have made an emphatic re-emergence into the market following a several year absence, with notable acquisitions of A1 Retail Park, Biggleswade (c.£49m), Thurrock Shopping Park, Thurrock (c.£82m) and the remainder share of the HUT Portfolio vehicle (c.£150m). Other assets are under offer at the time of writing.
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Out of Town Retail Warehouse
Transaction Volumes
Non-Food Retail Warehousing Yields (London & SE)
Contact details
If you would like dedicated out-of-town retail advice or to discuss potential retail and leisure opportunities, please get in touch with our team.
ukretail@cushwake.com
Cushman & Wakefield
@CushWakeRetailUK
@CushWakeRtailUK
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Marcus Wood
International Partner
Head of UK Retail & Leisure Investment
+44 (0) 7979 245430
marcus.wood@cushwake.com
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Martin Supple
International Partner
Head of UK Out of Town Retail
+44 (0) 7793 808 898 martin.supple@cushwake.com
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*from March 21 footfall growth is relative to 2019 levels.
Source: Springboard, ONS, C&W
Discounters, Gyms, Supermarkets and DIY continue to drive new store openings
Fashion retailers see the biggest reduction in new openings
Pandemic clauses now consistently required in any new lease / lease reversions
Sustainable lease clauses are now crucial to both the landlord and tenant
Incentives?
Turnover rents remain relatively rare
compared to other retail sub-sectors
Lease lengths continue to vary with many retailers opting for shorter, more flexible leases
Increase use of click and collect/ e-commence within physical stores
New retailers continue
to migrate into the
out of town market,
seeing the benefits
this can offer
Concessions / Retail
co-sharing becoming increasingly common
View in
full screen
2021 retail warehouse investment transactional volumes, [refer to chart below] have reached the 2nd highest level in the last 10 years, only bettered by 2015 (c.£4.35bn).
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Of the deal volume in 2021, c.58% were retail parks, c.22% were solus units/clusters and c.20% were portfolio deals, albeit the majority of portfolio deals were comprised of multi-let park assets. The key trend to draw from this is investor confidence returning to multi-let assets. Contrast to 2020 where solus units and retail warehouse clusters comprised c.29% of the overall transactional volumes, and c.62% of the volume seen in Q2/Q3 2020 amidst the initial shock of the Covid-19 pandemic.
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Retail warehousing has led the wider retail recovery. Those that called the bottom of the market in early 2021 will be polishing their crystal ball.
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Realty Income acquired a significant amount of non-food stock in 2020, albeit this entirely came in the form of 9 B&Q assets. Realty Income topped the 2021 retail warehouse investment charts and, whilst just over half of their 2021 acquisitions have primarily remained DIY-lead solus units and clusters, more significantly has been Realty demonstrating their appetite for large, multi-let schemes, through their major acquisitions of Hermiston Gait Retail Park, Edinburgh (c.£82m), Castle Vale Retail Park (c.£63m) and, most recently, Kingsgate Shopping Park, East Kilbride (c.£102m) to start 2022.
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Diversity in the buyer list (institutions, REITs, private equity, property companies, plus selected HNW private investors) keeps the market active.
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Sellers - Where are they coming from next?
Institutions were responsible for c.59% (c£2.2bn) of the overall retail warehouse volume sold
in 2021, with REITs and private equity firms comprising c.13% (£506m) and c.12% (£443m)
of all vendors respectively.
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Once institutional portfolios are
re-weighted, and strategies that
have been on hold since the
Brexit liquidity freeze are
implemented where will the
stock volumes come from?
The weight of capital to
invest will keep prices firm,
even as some investors
look to the shopping
centres market in
search of more
readily available
stock.
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Following the sale of their £330m 7-asset portfolio, Hammerson were unsurprisingly the largest vendor of retail warehouses in 2021, with c.9% of the overall volume sold (c.£358m).
Nuveen were the second largest
vendor, with c.8% of the overall volume disposed.
ASI, third, were comfortably the largest vendor in both 2019 and 2020.
Ugly duckling assets – fashion dominated parks – may yet grow into swans
Liquidity has returned to almost all retail warehouse subsectors. The unloved duckling shares its tenants with shopping centres, so no surprises that fashion-based shopping parks have lagged the general recovery.
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Investor demand has started to take a risk-off approach to selected fashion covenants. Expect the usual flood of post-Christmas sales reports to be devoured by analysis, and fund managers more so than usual at this time. Changing capital allocations to the sector is likely.
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Challenged retail can’t be left un-fixed forever
Some parks in challenged locations remain stalled. These assets still need to fail before
the wider recovery can take place in those catchments. The recovery in values may delay
the change of use.
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It is do or die time for long term remaining voids (Harveys, Toys, Carpetright, Homebase etc).
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Repurpose, Redevelop, Reposition, Reimagine,
are overused words and under implemented actions. The biggest brake to the Re…. wait-for-it … vival of retail is the simple economic fact that for too long valuations have taken time to adjust to the new, and in fairness constantly shifting,
new retail reality.
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As values start to reflect current and projected vacancy, plus associated CapEx, owners can begin to grasp the nettle of the options available to them in each location. Pro-active owners are already addressing the next big issues:
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Nudging planning policy towards the best value uses;
Adjusting the capital structure address the capex requirements, income shortfalls and development risks;
The thorny issue of inconsistent lease expiry profiles across multi let assets.
In Greater London and selected SE locations we are starting to see these steps deliver sales to a new segment of buyers. Berkeley (Kew), Prologis (Chingford in 2020) and LB of Barnet (Brent Cross) have all invested off the back of development scenarios.
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The harsh reality is that further value falls are required to make some of the more challenged locations viable in geographical locations outside of the SE or major cities. This goes against the grain of the recent recovery of investment pricing.
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New shopping habits favour the sector = further yield compression
Home deliveries have been around for many years. The pandemic made us fast learners, Early Adopters have been joined by both the Early Majority and Late Majority, there is now widespread home delivery.
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This trend will become embedded in shopping patterns long after the pandemic has passed. Elements of retail will have a place again in a core portfolio.
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Buy in haste, return at leisure
Emerging investment strategies capable of directing significant capital flows into the sector will be driven by the recognition that some out of town sites are mission critical to delivering efficient omnichannel retailing.
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Processing returns efficiently means significant margin gains. 80% of returns at Next are via stores, it can make huge profit improvements in the online channel vs pure play competitors, plus there are the opportunities for additional impulse purchases.
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Retail and the internet - best of friends
Given the significant demand for retail warehouses throughout the year, 2021 has seen major yield compression throughout the year across the sector, [refer to chart below] a trend which we expect to continue into 2022.
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Assets trading well in excess of their quoting price, particularly in Q3 and Q4, has been another key theme witnessed in 2021. Notably, this trend has been seen sector-wide, not just in DIY or secure, long-income assets.
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Whilst the internet has driven the unprecedented boom in logistics pricing it is also helping retail warehousing pricing. The margin between prime logistics and retail warehousing is still at around 250 bps.
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[Source: C&W]
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Russell Homer
Partner
UK Out of Town Retail
+44 (0) 7800 738 865
russell.homer@cushwake.com
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Outlook for
Investment Market
CLICK HERE FOR
Our Recent Review of the Shopping Centre Market Sector
Where can I next look to catch a falling knife
With all yield trackers indicating pricing bottomed out in 2021, a substantial weight of money uninvested, and ERVs stabilising in most locations; the outlook remains positive.
WE ARE CURRENTLY TRACKING IN EXCESS OF £700M
AS UNDER OFFER AND EXCHANGED.
Around half comprises two major assets in Bournemouth (under offer) and Romford (exchanged). With both
expected to achieve pricing in excess of £160m each,
these represent two of the largest assets the market
has transacted in recent years. Large lot size liquidity
has returned.
Debt availability is increasing - especially for those sponsors with proven track record and existing relationships. New market entrants can borrow but they will require more equity in the deal.
Stock supply is not yet an issue but once the market mops up unsold pandemic deals, and post Brexit sales institutional sales strategies are fulfilled, supply issues may also contribute to keeping prices firm.
As the sector recovery gathers pace the more opportunistic investors will be priced out. Investors may turn their attention to the lagging, but fast recovering, shopping centre market.
David Tonks
International Partner
Head of Repurposing
+44 (0) 1216 977 313
david.tonks@cushwake.com
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The Out of Town Retail occupational market proved to be resilient once again in 2021, driven by the following key drivers:
New letting activity in 2021 continued to be driven by discount food (Aldi, Lidl, Iceland), value (B&M Bargains, Home Bargains, The Range) and Athleisure (Sports Direct and JD Sports)
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Strong levels of leasing activity
Increased regear activity from established retailers (B&Q, Wickes, Currys, Next)
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Relatively low levels of corporate distress
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Contrasted to prior years, the Out of Town Retail sector witnessed less retailer insolvency, with the fashion market being the main subsector to produce insolvency with Arcadia (Outfit) and Peacocks being the only major retailers to close stores through corporate restructure. Another notable operator to restructure over the year was Pizza Hut which saw a number of units change hands in a strong F&B/drive-thru market out of town to operators such as Costa, Starbucks, McDonalds, KFC, Burger King, GDK and Tim Hortons.
Low vacancy rate of sub 6.0% (as compared to Shopping Centres c.16% and High Street c.14%)
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Responding positively to the demands of online sales growth
Home Improvement: Increased new store activity from the DIY Home and garden sector. B&Q have announced plans to roll out more of its smaller store format in retail parks and busy suburban high streets. Homebase and Wickes have active new store growth plans.
Outlook for Occupational Market
Gym / Leisure: The Gym Group, Pure Gym and JD Gyms remain acquisitive with the addition of multipurpose leisure operators either entering or remaining active in the market such as Jump, Ninja Warriors and I’m a Celebrity Get Me Out of Here.
Homewares: Bensons, Dreams, Furniture Village, Dunelm, Natuzzi and Wren
Kitchens are all open to conversations regarding new stores.
Leasing Activity to Remain Strong
Athleisure: Sports Direct and JD Sports continue to trade well and benefit from physical store format.
Fashion: new market letting will remain subdued but ongoing activity from regears from Next, TK Maxx, Matalan including relocations to improved locations on more tenant attractive lease terms.
We expect to see the trend of retailers entering partnership arrangements will continue to increase:
Retailers Partnering
Homebase partnered with Tapi and Bathstore in past
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Next with Costa, Paper Chase and Homebase on some of the stores with garden centres
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Asda with B&Q and Decathlon
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Natuzzi have partnered with Bensons
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Furniture Village have partnered with Carpetright
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The ESG Agenda
Moving away from gas heating – this is a challenge for the largest Out of Town Retail units
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Landlords and retailers will have to respond more actively to the challenges and opportunities of the ESG agenda
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Increased levels of negotiation on “green clauses” with both Landlord and Retailers push forward with their own corporate ESG policies
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Retail warehouse units offer relatively large roofs suitable for solar panels
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Increased EV charging points in car parks which will increasingly become a condition on planning consents.
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New letting activity in 2021 continued to be driven by discount food (Aldi, Lidl, Iceland), value (B&M Bargains, Home Bargains, The Range) and Athleisure (Sports Direct and JD Sports)
Ongoing regear activity from major retailers (B&Q, Wickes, Currys, Next) to rebase rents and improve lease term flexibility.
The pandemic has accelerated the number of click and collect points being installed within stores with many retailers prioritising their out of town units as they are typically larger, cheaper to adapt and have benefit of accessibility and ease of free car parking.
Food and DIY retailers have been particularly active in widening their “click and collect” offer.
Out of Town Retail units are also increasing their role in
“last mile” fulfilment given their convenient location close to customer catchments. Retailers such as Tesco and Sainsburys are increasing “in-store picking” particularly in the larger out
of town stores which carry the largest range to help supply smaller stores.
Thomas Vazakas
Partner
Acting Head of Sustainability
+44 (0) 203 296 2426
thomas.vazakas@cushwake.com
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The environmentally green future of Out of Town Retail is certainly exemplified in this Cushman & Wakefield EMEA Out of Town Retail instruction in Belgium, Malinas.
Relatively low levels of corporate distress
Contrasted to prior years, the Out of Town Retail sector witnessed less retailer insolvency, with the fashion market being the main subsector to produce insolvency with Arcadia (Outfit) and Peacocks being the only major retailers to close stores through corporate restructure. Another notable operator to restructure over the year was Pizza Hut which saw a number of units change hands in a strong F&B/drive-thru market out of town to operators such as Costa, Starbucks, McDonalds, KFC, Burger King, GDK and Tim Hortons.
Low vacancy rate of sub 6.0% (as compared to Shopping Centres c.16% and High Street c.14%)
Relatively low levels of corporate distress
Contrasted to prior years, the Out of Town Retail sector witnessed less retailer insolvency, with the fashion market being the main subsector to produce insolvency with Arcadia (Outfit) and Peacocks being the only major retailers to close stores through corporate restructure. Another notable operator to restructure over the year was Pizza Hut which saw a number of units change hands in a strong F&B/drive-thru market out of town to operators such as Costa, Starbucks, McDonalds, KFC, Burger King, GDK and Tim Hortons.
Low Vacancy Rate
Retail warehousing sub 6.0% as compared to Shopping Centres c.16% and High street c.14%.
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Challenges ahead
Retailers will need to respond actively to the emerging headwind of rising cost inflation.
Supply chain issues will slow active asset management and cause issues to retailers both with general operations but also in-store portfolio expansions.
Wage and energy cost inflation will need to be carefully managed against cost of products.
The Out of Town Retail occupational market proved to be resilient once again
in 2021, driven by the following key drivers:
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