The situation in the investment market tells a more positive story. In Q3 this year, demand for retail space increased by 7% compared to Q3 2023, while supply fell by 6%. An increase in demand for high street retail units was a key reason for the quarter\u2019s overall positive growth in demand.<\/p>\n\n\n\n
The findings from Rightmove\u2019s research are supported by Savills\u2019s Q3 market update. While still sounding a note of caution, it points out that consumer sentiment has improved in line with inflation coming down, although it should be noted that the report was published before inflation crept back up again in November.<\/p>\n\n\n\n
According to Savills, footfall on high streets and in shopping centres has also stabilised. \u201cAverage weekly footfall across both asset classes improved year on year in each of the first three quarters of 2023,\u201d the report states. \u201cFor each quarter over the last 12 months, both high streets and shopping centres have broadly remained near parity with the same period the year before.\u201d<\/p>\n\n\n\n
Less positively, footfall is still markedly down on pre-pandemic levels, but Savills points out that this is to be expected given the lifestyle changes brought about by Covid-19 that now at least appear to be permanent: the market needs to adjust to the new normal. \u201cIt is important to remember that the shift to hybrid working suggests town centres will perhaps never see numbers return to those seen in 2019,\u201d the report says.<\/p>\n\n\n\n \u201cThe positive news is average footfall levels have seemingly stabilised, providing a touch more certainty on how high streets and shopping centres will perform going forward and giving the sector a more solid foundation on which to build. This should provide retailers with some comfort, and be their key consideration in assessing the fortunes of the sector.\u201d<\/p>\n\n\n\n It appears that vacancy rates have also stabilised, which should provide another layer of comfort. Savills reports that high street voids were at 17.7% at the end of 2023 and currently sit at 17.6%, while shopping centre voids have remained at 14.0% throughout the same period.<\/p>\n\n\n\n \u201cThis suggests that, at present, the market is merely experiencing its usual churn, characterised by the ebb and flow of the fortunes of different operators, rather than any significant activity related to widespread financial stress,\u201d the report said, although again it should be noted that the report was published before the Budget, which saw an increase in employer national insurance contributions.<\/p>\n\n\n\n Knight Frank comes to similar conclusions in its latest quarterly report. \u201cAfter a protracted period of rent rebasing and portfolio rightsizing, retail occupier markets have achieved a state of relative stabilisation,\u201d it says. \u201cIndeed, many retailers are back on the expansion trail, but on a highly measured and selective basis.\u201d<\/p>\n\n\n\n The report acknowledges that there has been an \u201capparent uptick in occupier distress\u201d – at retailers such as The Body Shop, Ted Baker and Lloyds Pharmacy – but adds that this belies general stability. Quoting figures from the Centre for Retail Research, Knight Frank states that the number of operators and stores affected by Company Voluntary Arrangement (CVA) \/administration last year was at its lowest level since 2015, at 61 and 971 respectively. To date in 2024, the corresponding figures are 12 and 318.<\/p>\n\n\n\n It also has to be said that rents are also on the up, albeit marginally, which may explain the increase in investor demand revealed by Rightmove\u2019s Q3 tracker. According to Savills\u2019 in-house data, headline rents in high street shops and shopping centres reached an average of \u00a327.77 over the last four quarters. The analysis also reveals that rents have increased in each of the last five quarters – in other words since the height of the cost of living crisis.<\/p>\n\n\n\n Indeed, Savills remains bullish when it comes to the retail investment market, which is of course linked to the rental market. The company says that investment in shopping centres alone could still reach \u00a32bn this year despite lacklustre performance in the third quarter when investment volumes came in at a modest \u00a3171m. \u201cThe volume of stock in the market and the broadening pool of buyers suggests that our earlier prediction that turnover would reach nearly \u00a32bn this year is still achievable,\u201d it says.<\/p>\n\n\n\n According to Knight Frank, however, the availability of stock may act as a break on achieving higher investment volumes this year. \u201cThe consistent theme across all sub-sectors is a shortage of quality stock, with improving occupational dynamics and the hope of an imminent hardening in pricing encouraging owners to hold,\u201d it says.<\/p>\n\n\n\n \u201cThis undersupply has generated competitive bids processes on the lion\u2019s share of our recent sales, across all the main retail sub-sectors. The writing is on the wall with yield compression over H1 in the out-of- town market soon to be replicated in the in-town sectors in the second half of the year.\u201d<\/p>\n\n\n\n And yet retail property is at last of increasing interest to investors. It isn\u2019t hard to see why. Knight Frank points out that MSCI Total Return forecasts for the year are appealing at 8%, compared to 5.8% for the property market as a whole and 0.7% for offices.<\/p>\n\n\n\n \u201cWhilst total deal volumes for H1 are disappointing, for the first time in five years this is driven by a lack of stock rather than a lack of buyers and we are tracking more live retail requirements than at any point since the start of the pandemic,\u201d it says.<\/p>\n\n\n\n The outlook for retail property<\/strong><\/p>\n\n\n\n Looking ahead, Savills sees distinct trends emerging in the shopping centre and high street sub-sectors. When it comes to shopping centres, it says that the average size of centres in the market has steadily risen over the course of this year, with the first quarter average being 238,000 sq ft and the final quarter likely to reach 400,000 sq ft.<\/p>\n\n\n\n \u201cThe increasing size of assets that are being brought to the market has broadened the pool of buyers, with lot sizes of over \u00a3100 million beginning to pique the interest of domestic and international institutions,\u201d it says.<\/p>\n\n\n\n \u201cThis has moved institutional investors into the position of being the dominant buyer group over the first three quarters of 2024, accounting for 52% of the transactional volume (though only 13% of the deals by number). The other dominant buyer groups continue to be those that have led the market for the last few years, with property companies and retailers being the next most active groups by volume.\u201d<\/p>\n\n\n\n When it comes to high street or town centre shops, however, Savills says that larger investors will begin to play a greater role but will still remain minor players in the market. \u201cWe are beginning to see an increase in the number of \u00a310\u2013\u00a315m parades and blocks coming to the market, and this should also bring high street retail onto a wider group of investor\u2019s radars,\u201d it says.<\/p>\n\n\n\n \u201cWhile there is definitely rising institutional interest in retail as an asset class, we do not expect this to materially impact on the high street retail investment market due to the lot sizes on offer generally being too small for institutional investors. One consequence of this increased interest, however, might be that we see fewer institutional sales of retail assets in 2025 than we have seen in recent years.\u201d<\/p>\n\n\n\n Central London: a case apart<\/strong><\/p>\n\n\n\n So, while the retail sector remains fragile, there is every reason to believe that a recovery is in progress. The evidence from multiple sources is that balance between supply and demand for space in the leasing market is stabilising – and investor interest is higher than it has been for years.<\/p>\n\n\n\n While still suffering from the fallout from the Covid-19 pandemic, by most metrics central London is outperforming the rest of the country, driven in no small part by international visitors to the UK\u2019s capital.<\/p>\n\n\n\n Indeed, according to CBRE\u2019s latest quarterly report, covering Q3 2024, international sales and footfall in central London grew in July, August and September compared to the same months in 2023. Despite lower sales and footfall from domestic buyers, overall both metrics improved in the quarter compared to the same period last year.<\/p>\n\n\n\n That success is also reflected in London\u2019s vacancy rate. Using Local Data Company figures, CBRE reports that the vacancy rate in greater London currently stands at 10%, compared to the GB average of 11.6%. Streets in prime central London, however, are performing even better, with some boasting vacancy rates as low as 5%.<\/p>\n\n\n\n When it comes to capital investment, central London saw \u00a3111m worth of transactions in Q3 this year, down 74% on the previous quarter. However, CBRE points that such a dip is in line with seasonal patterns and that the figure is broadly in line with Q3 2023.<\/p>\n\n\n\n \u201cYear-to-date investor activity is approaching the full-year total for 2023,\u201d the report adds. \u201cFull- year 2024 investment volumes remain on track to exceed those of last year.\u201d<\/p>\n\n\n\n Sources:<\/strong><\/p>\n\n\n\n Rightmove Commercial: Q3 2024 Tracker – Commercial Property News<\/a><\/p>\n\n\n\n Savills: Spotlight: Shopping Centre and High Street \u2013 Q3 2024<\/a><\/p>\n\n\n\n Knight Frank: Retail Monitor – Q3 2024<\/a><\/p>\n\n\n\n![\"\"](\"https:\/\/www.rightmove.co.uk\/commercial-property\/news\/content\/uploads\/2024\/12\/Retail-1-1024x682.jpg\")
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