The Central London retail market is poised to continue its recovery trajectory, with the outlook remaining positive for the upcoming festive season. According to the New West End Company (NWEC), spending in the West End is expected to outperform the same period in 2022, which is particularly good news for Central London retailers who have had to contend with adverse weather, including one of the wettest summers on record.

The optimistic outlook for spend over the festive season can be attributed to an anticipated increase in international visitors to London, with the Capital expected to see an average increase in arrivals of 22% compared to last year. Albeit there remain concerns over the strength of this international spend in the absence of tax-free shopping. While the outlook for headline spend in the West End is positive, there are some headwinds facing domestic spend in response to the cost of living squeeze and the rising cost of debt, which was reflected in a contraction in spend in the West End over the summer months compared to equivalent 2019 levels. It is important to note that this trend was exacerbated by unseasonably poor weather. Despite this, with forecasts suggesting that inflation will continue to slow over the course of 2024 and into 2025, supporting positive real disposable incomes, we believe these headwinds to domestic spend in the West End will be relatively short-lived.

There has been strong momentum in leasing activity across Central London in Q3, particularly on key retail streets. For example, PSG and Dr Martens both secured units on Oxford Street East in Quarter 3. This trend is also reflected in the number of international brands securing their first ever site in London. For instance, American fashion retailer Varley opened its inaugural European store on Kings Road in August this year, Greek F&B provider Nammos opened its first restaurant in Knightsbridge in September, and Parisian fashion brand Rouje opened its first store on South Molton Street in May. Alongside these three, another 35 new entrants have launched debut stores in various locations across London in 2023, with ten of these opening over Q3. Savills expects that by year end, accounting for pipeline projects, the 2023 figures for new international entrants will likely surpass those of 2022 to be in excess of 54.

The momentum in leasing activity has been placing downward pressure on vacancy across a number of prime retail streets in the West End. Prime West End vacancy fell for the fifth consecutive quarter to 6.5%, down 282 bps on Q2, as such, vacancy levels are now sitting roughly in line with those of Q3 2020. Furthermore, the unit vacancy rate on Oxford Street East has decreased by more than half, dropping from 9.9% in Q1 to 4.3% in Q3. Likewise, Regent Street has shown a positive trend, as its vacancy rate has decreased from 12.9% to 5.0% over the same period.

A noteworthy trend in Q2 and Q3 is the sustained demand for larger-sized units, a trend initially identified by Savills earlier this year. While this market has historically seen relatively low leasing demand, it is understood that the scarcity of these larger units in Central London has intensified competition among those looking to secure large flagship stores.

Headline rents continue on an upward trajectory

Unsurprisingly, declining vacancy has started to generate upward pressure on rents. All Central London saw Q3 headline ZA rents increase 6.8% year on year, with the Core West End reporting a stronger uplift of 8.2%, driven by increases in affluent villages such as King’s Road and Marylebone High Street as well as on streets re-emerging as exciting and more ‘affordable’ retail locations for brands, including South Molton Street and Long Acre.

In the case of some of the affluent London villages, indicative prime headline ZA rents are now fully recovered or above pre-pandemic peaks. For example, Marylebone High Street prime headline ZA is 5.9% above its 2019 peak, with Kings Road prime rents back in line with that seen in Q1 2019. However, while rents continue to recover in many locations, on average, they still remain significantly below pre-pandemic levels, with prime ZA rents across the core West End area being 15.7% below where they were in Q4 2019. Looking forward, the continued squeeze on availability and appetite from occupiers means that we expect to see upward pressure on headline rents persist for the remainder of 2023 and into early 2024.

Central London retail investment overview Q3 2023

As in Q1, high debt costs have curbed Central London investment activity, and, as such, there has only been a total of eleven transactions in total for Q2 and Q3. Despite this, this figure is 22% up on the count seen during the respective period in 2022. Notwithstanding the challenges that higher debt costs have generated in terms of deal activity, in value terms, year-to-date volumes of £958.9 million are already 83.5% higher than full-year 2022 volumes. Volumes this year have been buoyed by a select number of sizeable deals on Bond Street, where buyers' source of capital is more immune to wider trends in the debt market. Recent activity includes the sale of Swan House on Old Bond Street to The Swatch Group for £103.5 million in June. Other notable retail deals in the West End in Q3 include the sale of the Soho Square Estate for £70 million to GPE in August, which includes retail units 29–43 on Oxford Street.

Investor appetite for Bond Street means that we continue to hold prime yields on the street at 3.00%. Likewise, the prime yield for Oxford Street also held at 4.50% in Q3, albeit this is more a reflection of reduced transparency in the absence of deal activity rather than a reflection of investor appetite.

Further reading:

Spotlight: Shopping Centre High Street Q3 2023

UK Leisure report 2022

The latest edition of Re:Imagining Retail is out now – read issue 3 here