Knight Frank’s latest retail research suggests that out-of-town retail in particular should benefit from the improving economic backdrop, although the recovery is patchy and the impact on rents is likely to be mixed. The general theme in the sector has been the much quicker and more pronounced recovery in the investment market, compared with an occupational market which is still lagging. As a result, there has been a decoupling between rents and capital values.
A significant weight of capital remains targeted at the out-of-town investment market, which still offers good value. For example, a bulky goods development on Moor Lane in Exeter with rents of £20 per sq ft is under offer at 6.25%, while Albion Mills in Wakefield, with rents of £14 per sq ft, traded at 7.25%. Arguably, these developments are very similar and the yield differential of 100bps is difficult to justify.
Falling yields have been a major feature across the market for the last twelve months and further compression is likely by the end of this year. However, better rental growth prospects for the bulky goods sector are likely to mean a more significant downward yield shift on these assets by the year-end.
Shopping centre development should also receive a boost from the stronger economic backdrop. Whilst the current pipeline remains well below that seen in the run-up to the financial crisis, there are signs that developers are responding to the more positive economic data and are preparing to kick start existing and new proposals.
Current forecasts suggest that only around 100,000 sq m of new shopping centre space will be delivered this year, with an additional 110,000 sq m in 2015. However, if the economy and the availability of debt continue to improve, the pace of development should accelerate and the pipeline forecasts will be revised.
New schemes remain few and far between and, for the time being, development activity will continue to focus on refurbishments and extensions to existing schemes. With the consumer experience now uppermost in landlords’ considerations, a strong leisure component, potentially including a cinema and a high quality food & beverage offer, will feature increasingly in shopping centres. Good examples include a number of projects being undertaken by Hammerson and Intu who are making significant improvements to the catering and leisure offer in a number of their schemes.
Darren Yates, partner, commercial research team, Knight Frank, commented: “Shopping centre developers will take comfort from the more positive economic sentiment, but the short term focus will continue to be on extensions and improvements to existing schemes. More than ever, it’s about place-making and the creation of destinations where people want to go, rather than simply have to go. Having a good quality catering and leisure mix is a key part of that. “
Andrew McGregor, head of leisure and out-of-town retail, commented; “We are forecasting a better year for the out-of-town retail market in 2014. We expect the performance of some bulky/perceived secondary schemes to improve given tenant tension and the ability to “soften” the planning. However, as ever, careful selection at the town and asset level remains critical to generating outperformance”