Since the pandemic, cost of living crisis and inflation linked rate rise, shopping centres have been viewed as unwelcome, secondary assets against the sexier sheds, beds and meds. However, there has been a significant shift with 2024 poised to be a year of strong investment in the sector. Institutional investors are leading a resurgence, with investment volumes projected to be double those of the previous 12 months. This growth is driven by easing inflation and rising consumer confidence, signalling a renewed belief in the stability and profitability of retail assets. If current trends continue, 2024 could mark the highest shopping centre investment volumes seen since 2015, setting the stage for a highly competitive and promising retail investment landscape as we move into the New Year with shopping centre investment volumes forecast to increase further in 2025. John Griffin, Head of Investment at LM looks back at the market drivers behind this shift and outlines and where the potential lies for 2025.
The first obvious thing to recognise is that we are operating in a very different economic climate than we have in recent years. A combination of greater political stability, unemployment levels close to a 50 year low, and real household incomes rising has resulted in GDP growth this year. This has remained solid, if not stellar, over the course of this year and we expect that this will continue into 2025. As a result, the consumer is feeling more optimistic with inflation back under control and interest rates trending down. The Governor of the Bank has even suggested they could be more aggressive in cutting rates – welcome news to homeowners and consumers who have all suffered since Truss’ mini budget and the disastrous fiscal downfall of Autumn 2022. Forecasts suggest base rates could be down to 3.75% by the end of 2025.
The result of this increase in consumer confidence are sales volumes and values which, whilst they have been erratic, are in positive territory. Retail sales in have recently seen 3 months of consecutive sales growth and volumes up close to 4% year on year, the largest rise for over 2 years. We really can’t underestimate the UK consumer and their desire to socialise and shop in store and in bars and restaurants.
The beauty of the retail game is the immediacy of occupiers to capitalise on improving growth – in a way you don’t get with any other sector. A strong week’s trading leads to calls to the property team for greater physical representation. After what has seemed like a lengthy period of rent rebasing and rightsizing portfolios, occupier markets in-town have stabilised. The “Watch List” is shorter than it has been for a while and my colleagues in the shopping centre leasing team – who advise on over 1,000 deals on annual basis – are seeing greater occupier tractions across the 50+ schemes that we are involved in. There is clearly less occupier distress and vacancies with more new concepts and brand expansion. Whisper it quietly, but we are also seeing growth in net effective rents across some of our schemes…
Physical stores should be the beneficiary of further increases in consumer spending as the growth in online spend has slowed. The consumer still craves the experiences of physical retail. We are however conscious the improvement is not a straight-line graph across the whole retail landscape. Some locations still suffer, and will continue to, from oversupply which shows the absolute importance of stock selection and being on the right side of the demand/supply dynamics.
The growth in hospitality spend and the increasing influence of the food, beverage and leisure in shopping centres has resulted in improving footfalls and dwell times across all our centres. It also adds to the ‘retail theatre’ and with new entrants and shopfronts, the mood overall feels so much better.
On the back of more confidence in the sector and interest rates trending down, we are seeing renewed awareness from the lending banks in the sector, particularly those that have marked to market previous bad debts on assets. Similarly, 5-year swaps (Sonia curve) have contracted by almost 100 bps over the last year and with lending margins reducing (with increased competition) the availability of senior debt and its cost has been welcomed by borrowers as well. Married with traditionally high yields on offer, where rents have virtually all been rebased, the delta between cost of finance and running yield is once again compelling. Blue chip lenders such as Barclays, Lloyds and NatWest have recently re-entered the fray, lending on centres in Solihull and Aberdeen and refinancing the SGS portfolio (part of the former Intu stable of centres). Over the next few months, with increasing competition amongst lenders, we should see LTV’s rising together with margins contracting from today’s levels.
The pool of buyers in the sector is deeper than it has been at any time over the last five years. The opportunistic post Covid acquirers benefited from some rich pickings yield wise, and the levels of deal activity in ‘21,’22 and ’23 was surprisingly acceptable considering the negative sentiment in the sector. The buyers were essentially private investors at mainly sub £10 million lot sizes on an all-equity basis as there was limited debt available. The more prime assets and larger lots sizes were rarely available to buy, with so few parties looking to commit north of say £50m equity in one deal.
The most interesting development in 2024 has been the increased activity from more institutional buyers. They have emerged as dominant forces in the market, outbidding private investors, family offices, and other private investors. The likes of Landsec have very publicly stated they want to deploy more capital in the shopping centre market with CEO Mark Allen stating “If I look across the different parts of our business, I think there is really good money to be made in central London office development… but to my mind the best risk-adjusted is the low double-digit unlevered return on prime retail, and we firmly intend to put more capital to play in that market.”
Their ability to deploy cheaper capital highlights a growing divergence in the buying pool of investors. As these larger investors swoop in, those who acquired distressed assets post-pandemic are reconsidering their portfolios, contemplating divestment in the face of increasing institutional interest. Examples of bigger ticket deals and more institutional players competing include Meadowhall (50 per cent), Cribbs Causeway (50 per cent), Milton Keynes (50 per cent), Edinburgh (25 per cent). There have also been multiple bidders for asset sales in Maidstone, Stratford, Newbury and a portfolio of three centres in Loughborough, Kings Lynn and Dunfermline that we were instructed to sell.
In conclusion, the UK retail investment sector is showing a level of optimism not seen in recent years. With over £1 billion in transactions completed and an additional £900 million either under offer or in the market, the outlook is promising. This resurgence is being driven by a combination of improving macroeconomic factors, a rebound in consumer confidence, and physical shopping levels returning to pre-pandemic norms. Retail tenants have benefitted from rebased rents and lower occupational costs, while buyers are increasingly confident, armed with a more sophisticated understanding of rent affordability and sustainability.
With capital values per square foot still well below rebuild costs and vacancy rates declining, downward-trending interest rates are fuelling buyer competition, leading to a tightening of yields. The market dynamics have evolved significantly from just 12 to 18 months ago, with a deeper pool of investors vying for retail assets. As a result, retail property as an asset class stands on the cusp of renewed growth, with 2025 set to deliver further gains in both investment volumes and market confidence.
LM is a leading real estate leasing and investment agency that advises many big-name investors into retail property. The multi-disciplined business represents occupiers, landlords, investors and local authorities and some of the UK’s most active retail and leisure destinations, from super prime to district locations. With over four decades of expertise in retail, LM has established itself as a leading advisor in the sector, offering unparalleled insights and strategic guidance on retail assets and occupier demand across the UK market.
