Key Growth Drivers

We are focused on the winning sectors within retail: retailer-led distribution and convenience-led retail. Property trends are evolving, responding to how we shop with increased delivery of goods in cardboard boxes or smaller, more frequent, shopping trips. Property’s bond-like characteristics have driven investment demand and an improving UK economy and real wage growth is improving the outlook for retail. We explain more below.

UK retail market
Consumer shopping habits are evolving

The UK retail market continues to face structural change as shopping habits continue to evolve.

Secular change has been driven by the recession and the rise of eCommerce.

The consumer is seeking experience, value for money and convenience. According to Verdict, online sales now account for c.£39 billion of retail sales, or 12.6% of total sales, and are forecast to continue to grow significantly ahead of store sales.

Today’s shopper is more knowledgeable, more mobile and increasingly more demanding. Retailers have to work harder to meet the consumers’ demands of instant gratification.

Omni-channel
Retailers are adopting omni-channel

An omni-channel approach provides a seamless shopping experience for the shopper whether they are buying online, via mobile, over the telephone or in store.

Shoppers are increasingly agnostic to the point of sale, however they want their goods to be available for delivery, collection or in store, to meet their own personal requirements.

Retailers are increasingly embracing this approach to meet the high expectations of the consumer with a shift to everywhere consumption.

This, together with an increase in pure play retailers such as Amazon, The HUT Group and Boden, is creating added demands on the retail industry resulting in increased investment in distribution and fulfilment which could be considered as important, or even more important, than physical stores.

Property Trends
Driving property
trends

Retailers continue to right size and optimise their real estate portfolios.

We continue to see retailers downsizing and rightsizing their number of stores but increasingly focus on more efficient distribution and fulfilment space. Distribution and fulfilment sheds could be considered the new shops.

Distribution & Retail
Resulting in demand and supply dynamics

Distribution

According to Savills, 2014 saw a significant increase in logistics take up to 32.5 million sq ft.

Retailers remain the dominant force representing 66% of total market take up. From a peak of 94 million sq ft in 2009, availability is at its lowest level since records began at 22 million sq ft. This drastic fall in supply has not, however, resulted in developers rushing to develop units speculatively in the same volumes as previous cycles.

Requirements are increasingly for bigger units, supporting more complex automated activities to respond to increasing consumer demands. Warehouses are being replaced by sophisticated logistics centres with increasing automation. As a result, coupled with the lack of available stock, design and build development accounted for 81% of all new take up in 2014.

Demand and supply dynamics are favourable for real rental growth.

Retail

Local Data Company (LDC) estimates current vacancy across the retail market sits at 13.0% of floorspace.

An over supply of retail space coupled with highly specific retailer demand means that a return to rental growth across the entire retail sector is unlikely in the near term. Lower oil prices and real wage inflation is giving consumer spending a boost. However, retail shops need to fulfil a specific purpose to attract the shopper through experience, convenience or value for money. Solid demand from convenience and value retailers continues to benefit certain assets resulting in a need for management to have a firm understanding of the market and the specifics of each asset owned or managed.

Supply of new retail space remains subdued with a historic average between 1999 and 2008 at 14.2 million sq ft per annum versus forecast 2014 to 2017 of 5.6 million sq ft per annum. The wider oversupply of retail accommodation is resulting in reluctant developers.

However, the growth in convenience shopping, particularly in the food market, will provide new opportunities for pre-let development. Convenience retail also supports click and collect with Verdict forecasting sales to grow by 86% in the next five years. Click and collect also benefits the wider shopping destination with 36% of click and collect sales resulting in a further store purchase.

Re-Rating
Leading to a re-rating in asset pricing

2014 saw significant capital inflows into the UK real estate market resulting in continued hardening of yields across all sectors of the market. Yields now sit below long-term averages supported by the low interest rate environment.

Distribution

The bond like investment characteristics of the distribution sector is highly sought after.

Long leases to strong covenants, often with contractual fixed or inflation linked uplifts, provides a highly robust and predictable cash flow. This is coupled with secular change driving an increased demand and supply imbalance with increased prospects of rental growth in the market. As a result, £2.85 billion of investment transactions across 135 deals were completed in 2014 driving yields for the best assets to record lows.

Retail

The retail investment market remains dynamic.

Lower oil prices and real wage inflation is attracting increased investment volumes in to the sector with the belief that consumers will spend more money thereby driving rental value growth. As a result, £10 billion retail investment deals were completed in 2014 across c.500 transactions. Yields are re-rating for the right assets but in poorer locations poor quality space which does not conform to shoppers’ requirements or meet occupiers’ demands are not benefiting from the same investor interest.

Outlook
Outlook

We believe the retail market will continue to evolve.

Shopping habits will become more entrenched with property trends becoming increasingly pronounced.

Consumer shopping habits have changed and the retail market continues to catch up. We believe that the sales growth from stores may never be as strong as the sales growth rate of online, however we do believe physical stores will remain vital to the omni channel retailer, underpinned by click and collect and internal showrooming.

Distribution and fulfilment networks are critical for both omni channel and pure play retailers to win and retain brand loyalty with consumers – narrowing the time to get a product to the consumer is key.

We seek to position our real estate portfolio to benefit from these wider trends.

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