The retail market, as a whole, continues to perform positively. With employment levels continuing to rise and an increase in real wage growth consumers are benefitting from more disposable income. There is also more stability following the General Election, accepting that retailers will need to adapt to changes announced in the post-election budget. Whilst the introduction of the National Living Wage has seen mixed reactions from retailers, on balance, it appears most view this as a progressive measure for workers and one which will feed through to retailers through increased consumer spend. Possible changes to Sunday trading hours in England & Wales are also expected to deliver benefits to retailers, accepting there is a need to ensure any legislation ensures Local Authorities do not pick and choose which areas of their catchment will be eligible for extended trade hours.
The economic upturn, which has, at last, surpassed pre-recession levels, continues to be good for the retail market. This is evidenced not only through strong trading and profit results from Zara and Next but the continued entry of new retailers to the UK. In this issue of Drapers Property Supplement we focus on one new entrant, Pep & Co, a discount fashion chain, who recently opened their first store and will trade from 50 UK stores by the end of 2015.
In this issue we also discuss the continued success of UK outlet centres, which have evolved from largely clearance centres for surplus inventory to vibrant and exciting destinations where people visit for a luxury retail experience. Flagship centres such as Bicester Village and Cheshire Oaks are also popular tourist destinations where people will travel from a distance to purchase out of season luxury and aspirational goods. People visit them not only to shop but to have a great day out, which can include going for a meal or attending a fashion show.
As retailers continue to capitalise on a now truly global retail market we explore Australia, which has seen an influx of foreign retailers in past few years, including from the UK Top Shop, River Island and Reiss, who are all looking to capitalise on its strong economy, young demographic and global tourist market. Sydney’s prime shopping district is now one of the most expensive in the world and with H&M recently opening one of their largest global stores in Melbourne the country is cementing its position as a strategically important region for international retailers.
As we look forward, we continue to see a positive market ahead for UK retailers and a continued need for retailers to compete at a global level as they seek to develop their brands.
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European commercial real estate investment volumes reached a record high of €285 billion in 2017. This represents an increase of 9% on the previous year and 2% up from the previous peak in 2015. An upturn in UK investment volumes, coupled with a near record performance in Germany, provided a significant boost to European volumes, contributing €73 billion and €57 billion respectively to the year-end total.
After a record year in 2017, European commercial real estate investment volumes reached €57bn in the first quarter of 2018. This is a modest increase compared to the volume recorded last year and represents the third strongest opening quarter on record. Last year, platform deals and corporate acquisitions dominated the market with several multi-billion Euro transactions. Platform transactions were more limited in Q1 2018, but several are expected to come to market in the remainder of the year.
UK economic growth slowed to 1.5% in H2 – Retail sales volumes grew by 0.9% and unemployment rate is holding at 4.3%.
UK high street rents for ten cities grew by 2.6% over the past 12 months and the busiest shopping destinations continued to see rental growth.
Overall, high street transactions have decreased by 7.8% in 2017 to £1.13bn. The High Street investment market for 2017 was characterised by lot size.
Central London demand and supply remain finely balanced as rent remain resilient in key streets.
Central London investment volumes rebounded in Q4, but restricted to £1.5bn in 2017 due to very few large transactions.
The amount of new shopping centre space opened was c. 187m sq ft in 2017, in part largely due to the contribution of three main schemes.
Shopping centre transaction volumes were 30% down in 2017 on 2016 and reached 2.13bn. Activity for ‘Best Secondary’ assets rose.
Retail Park have seen a slowdown in construction activity, prime rents for all Retail Warehouse Parks have increased by 0.5% annually over the past three years.
Grocers are now selectively starting to take up space again for smaller store formats.
Casual dining operators face challenging times due to consumer’s decrease of disposable income, a decrease in consumer confidence and cost pressures and cost pressures.
The Logistics sector is evolving further with online retail and third party logistics gaining momentum.
The Christmas results for retailers showed a mixed performance and if inflation at 2.7% (CPI) in December 2017 is taken into account, the story for many occupiers is not as strong as it might have been hoped.
The next generation of luxury customers is currently spending less on luxury products than older consumers, but they are likely to purchase higher volumes of more affordable luxury goods in future, and will prefer to use the newest technology to carry out their purchases. It is therefore important for luxury retailers to understand the next generation of customers in order to use their purchasing power and to increase brand loyalty prior to the moment when they are able to afford their high-end products. We look firstly at the characteristics of this new generation of tech-savvy shoppers, and secondly at how luxury brands must respond to their needs.
In this report we look at how economic, political, and technological forces will affect property markets in 2018 and beyond. This report is the most comprehensive sector-by-sector outlook in the industry, from flexible office space to e-commerce, and from data centres to built-to-rent. There’s a comprehensive supplement on Brexit, plus a special feature on ‘proptech’.
• A benign global economic environment, supported by a European recovery, though the UK is starting to fall behind.
• Subdued consumer spending and business investment arising from a weak currency, inflation and Brexit uncertainty.
• Risks of an overshoot in US interest rates could dampen UK growth in 2019 or 2020, though increasing clarity over Brexit will help the UK bounce back.
• Rebounding strongly from the uncertainty in the immediate aftermath of the EU referendum, the UK property investment market has seen a surprise surge in transaction volumes, particularly from overseas investors. Investment volumes are likely to remain robust at around £60bn for 2018 as a whole.
• We expect substantial political noise and turbulence arising from Brexit issues throughout 2018.
• Although agreement on Brexit withdrawal issues has taken time to secure, these issues are not likely to have significant impact on real estate. But attention will now progress to the much more important question of future trade and migration arrangements.
• EU trade access is likely to be worse than the UK has now (perhaps somewhere between the Canadian and Swiss deals with the EU), though only to the extent that migration controls are tighter than they are now.
• Our sectoral picks include industrial and logistics property, especially in urban areas and the so-called ‘beds sectors’ (residential, student accommodation, hotels and healthcare).These sectors either exhibit non-cyclical characteristics, have very significant demand and supply mismatches, or (in the case of hotels) will benefit disproportionately from the weaker pound.
Please feel free to contact us if you would like to discuss any aspect of the report.