Publication

Market in Minutes: Central London Retail – Q3 2022

West End occupational markets remain buoyant in the face of economic headwinds, although outlook for early 2023 remains cautious


Despite mounting economic headwinds, we have continued to experience a relatively buoyant occupational market in recent months, driven in part by international tourism reporting continued recovery.

International arrivals to Heathrow in October reported a 14.7% gap to 2019 equivalent levels, representing the second-best performance compared to 2019 levels following September’s gap of 13.6%. However, on a month-on-month basis, October figures were up 1.3%, pointing to ongoing improvements to the inbound tourism market.

Currency continues to play a role, with the value of the pound dropping in recent months, resulting in arrivals from USA reporting just an 8.2% gap to 2019 levels in October. Looking ahead, this trend is likely to continue, with booking from the USA up 41% on 2019 levels for November, increasing to 58% up for December 2022 according to NWEC.

In October, West End sales were down just -2.6% compared to equivalent 2019 levels, representing a 14 percentage point improvement compared to the September change, while the domestic/international spend split returned to 50:50.

Looking to the Golden Quarter, NWEC is forecasting a 24% year-on-year (YoY) uptick in West End turnover, driven by a less restrictive festive period compared to 2021. Nonetheless, this still represents a 28% gap to 2019 levels, as many domestic households are likely to be shopping more cautiously in the face of rising cost of living.

However, some parts of the market could be slightly more insulated from these headwinds. A relatively uninterrupted winter in terms of Covid restrictions compared to 2020-2021 is expected to support the leisure sector through more festive socialising and corporate parties, whilst the first-ever winter FIFA World Cup will likely boost food and drink sales.

Prime Zone A rents reported a marginal improvement in Q3 2022 on a quarter-on-quarter basis, bolstering the argument that rents have reached the bottom of the cycle

Joshua Arnold, Associate, Commercial Research

From an occupational point of view, the F&B sector remains particularly active despite significant exposure to energy price increases due to the energy-intensive nature of the sector. This demand has been emphasised when looking at new international entrants to central London. F&B new entrants are forecast to welcome 21 new international brands by year-end, up 31.3% YoY while outstripping the 20 new retail openings expected over the same period. Notable recent openings include South Korean brand, Paris Baguette, opening its first site at the Battersea Power Station development, and Australian brand Meat & Wine Co. opening on Curzon Street, Mayfair.

For operators, the unknowns around what will replace the energy price cap in April is a further cause for concern when it comes to forward planning, and so could temper new occupational demand as we move into the new year.

Prime Zone A rents reported a marginal improvement in Q3 2022 on a quarter-on-quarter basis, bolstering the argument that rents have reached the bottom of the cycle. Despite this quarterly improvement, central London prime Zone A rents remain in negative territory on a YoY basis, down -1.7%, although this does represent a marked improvement from the -6.7% reported in Q2.

Meanwhile, the core West End part of the market reported YoY improvements (+3.9%) for the first time since Q4 2018, driven by a return to £2,000 psf Zone A for Bond Street against the temporary dip to £1,750 psf recorded in Q3–Q4 2021.

Vacancy, by unit count, has continued to fall, reporting 11.3% in Q3 2022 for the Prime West End area. While it is promising to see a drop from the peak 14% reported in Q1 2021, vacancy remains significantly higher than pre-Covid levels and the quarterly improvements remain relatively gradual. This is consistent with operators generally being more cautious in terms of the number of new sites they acquire compared to their approach pre-Covid, coupled with a number of larger-sized assets available which are typically harder to let.

Outlook

The immediate outlook remains mixed. Continued recovery to international travel and an uninterrupted winter period points towards a strong Q4, but a weakened consumer sentiment could offset some of this positivity. This weaker sentiment is likely to be pronounced as we move into Q1 2023, a period where inbound tourist flows are ordinarily lower and continued high inflation will be continuing to dampen UK household disposable incomes. This may soften occupational demand over the first three months of next year. But with many retailers/F&B operators taking a longer-term view, we don’t expect this to have a material impact, particularly as the forecast recession is expected to be shallower and shorter than previous downturns and prime headline rents are still 25.7% below pre-Covid levels (Q4 2019).



Central London retail investment overview Q3 2022

Key investment headlines

Central London retail investment has remained limited, with just 11 deals, totalling £448.6 million this year to date (Q1–Q3 2022). This represents a -22.9% decline YoY and under half the equivalent 2019 levels.

The most sizeable of the four deals in Q3 2022 was the £53 million acquisition of the Foyles Building on Charing Cross Road, marking the first non-domestic investment by German buyers MOMENI Group.

As mentioned in previous versions of this publication, currency play could continue to entice some overseas investors, particularly from the US whilst the value of the pound fluctuates near historic lows.

A lack of transactional evidence continues to muddy the true extent to which current pricing has changed, but we are suggesting a 25 bps outwards movement across key West End streets based on current sentiment.

It’s likely that prime yields will move further outwards over the next six months, in line with ongoing economic headwinds and rising concerns over the cost of debt. We have experienced similar outwards yield movement across other asset classes, such as West End offices which have reported a 50 bps shift between August and October 2022, currently reporting 3.75%.



Further reading:

Spotlight: Shopping Centre High Street Q3 2022

UK Leisure report 2022

The latest edition of Re:Imagining Retail is out now – read issue 2 here