It is hard to argue the UK retail warehouse investment market has seen anything other than a thin first quarter in terms of transaction volumes. Q1 2024 saw £451m transacted, 16% less than the same period the previous year and a 33% reduction on the long-term quarter average since the turn of the millennium.

Nevertheless, the movement in pricing seen this year suggests the negativity that has impacted volumes since the second half of 2023 has given way to a more optimistic investor mindset, albeit still with a pinch of caution around lot size and geography.

The improvement in sentiment amongst the buyer pool has almost certainly closed the gap between the traditional ‘core’ purchaser and the opportunistic or value add buyer, those that were looking to secure assets at a yield of 8% plus and build capital value as pricing improved. 

This gap was prevalent as little as five months ago; however, all Savills yields have moved in 50 bps since the start of the year, including Prime Open A1 (now at 5.50%), Prime Restricted (6.00%), Secondary Open A1 (8.25%), Secondary Restricted (8.50%) and Shopping Parks (7.00%). Clearly confidence is beginning to build in the market, particularly amongst savvy investors who recognise the strength of the occupational market and prospects for continued rental growth.

Lothbury’s sale of Silk Bridge Retail Park in Hendon to Delta Properties is a good example of how quickly yields hardened as investor enthusiasm improved in the New Year. Pre-Christmas, this scheme was for sale and received two offers at a net initial yield (NIY) of 7.00%. Following the advice to hold, the vendor completed the transaction in March at an improved pricing level, achieving 5.87% NIY and exchanging at £16.25m.

Although investor optimism has seen pricing harden in recent months, experience tells us that subsequent transaction activity tends to build from a trickle rather than come all at once in great waves. 

It is therefore still early days in terms of a recovery. Q2 has so far seen only £142m transacted, with purchaser interest dominated by prime schemes in London and the South East.

However, although there is some way to go yet, as the year rolls on and confidence builds, we expect to see investors grow increasingly comfortable with the sector, resulting in an expansion of requirements in terms of their geography, as well as a growth in appetite for larger lot sizes – a fairly typically scenario for an improving retail warehouse investment market when you take a cursory look at previous cycles.

This rings true when you consider there is c.£500m of stock in the market that is currently under offer. This would bring volumes in line with those seen in H1 2023, assuming those deals all came to fruition. 

The Tandem Centre in Colliers Wood is a good example of a London-based asset that has added another degree of certainty to the buyer’s barometer. The asset was marketed early in 2023 and went under offer to Aviva but subsequently fell out of bed. Following some strategic occupational deals, the scheme was relaunched in March 2024 at a renewed price of 6.5%, with La Salle/ BPF selling. The competition for the asset was strong – in the end, abrdn won out and placed it under offer over asking at £61m, which is just shy of 6.00% NIY.

Meanwhile, Phoenix Retail Park in Corby in the East Midlands provides the market with some evidence of how investor confidence is beginning to grow beyond the South East. This scheme was sold to Columbia Threadneedle for £26m in May, achieving a NIY of 7.48% for the vendor, Peel Holdings (a c.120,000 sq ft Open A1 scheme).

Who is buying retail warehouse assets?

In the market currently, there is only a handful of thematic buyers looking to build scale. Institutional investors make up the majority of those interested in the sector and include UK pension funds, each looking to do one or two deals in this cycle rather than a blanket buy of assets. 

However, the key message to any investor should be wrapped up in the fact that we have seen a 50 bps fall in pricing across the sector, despite a relatively limited volume of activity. This has brought with it an improvement in capital values for those that chose to move and, with rental growth evident and set to continue as competitive tension in the occupational market builds, the savvy investor would be wise to increase its exposure to the out-of-town market beyond the odd solo deal.

As we have discussed, there remain some question marks around how you capture some of that rental growth. Fully let schemes, length of deals and regears rather than vacating units evidently slow the growth in rent the market could achieve. As a result, we are likely to see a more moderate increase of c.5% YoY, rather than any steep climb across the market.

Capturing rental growth obviously requires an investor to be in the right space, with prime assets likely to offer the strongest opportunities. However, as a house, it is our opinion that continued rental growth is almost certain, given the strength of the occupational story, lack of available space and continued appetite for retailer expansion.

The reason we perhaps don’t see deeper investment interest from buyers is, therefore, twofold: the first being opportunity-led, the second potentially linked to historical sentiment. 

Firstly, despite increasing interest, there has simply been a lack of stock available in the market to satisfy even average demand levels. It would be too strong to suggest vendors are holding on to assets for the time being in anticipation that yields will harden further and secure them a more competitive price. However, sellers are sellers only at the right price rather than motivated by distress or a need to sell regardless, in order to satisfy shareholders or secure funds for investment elsewhere. Lion Retail Park in Woking, for example, received bids in February at a NIY of 5.75%; however, British Land is willing to hold unless it achieves a bid at its desired 5.50%.

Having said that, our advice to sellers is not to hold indefinitely in anticipation the market will increasingly get better. The market has already seen sufficient improvement, is set fair, moving in the right direction and at a sensible price. Those who want to sell should not be afraid to do so now – having had the value accretion over the last six to nine months, the opportunity to capture uplift is upon us.

The second reason investment in the sector hasn’t come in the volumes it perhaps should is arguably longer term and engrained into investor psyche – that with a finite number of operators, the sector is overexposed to a potential failure. Furthermore, some owners of property may indeed view other sectors with rose-tinted spectacles based on the simple premise they make up the majority of their investor portfolios.

However, with such a strong appetite for space and, from such a broad array of brands in terms of their operational focus, this mindset somewhat over-eggs the pudding. INCANS Tenant Global Score, which is a measure of the financial strength and stability of a retailer based on its public accounts, tells us the financial stability of the sector’s top operators is solid. Of the top 25 larger format operators, in terms of the number of units they have across retail, leisure and shopping parks combined (excluding F&B and gyms), 20 are considered ‘low risk’ or ‘very low risk’ in terms of failure. It is, therefore, our belief that the risk and return relationship looks much more favourable for retail warehousing than it does other sectors, which don’t have such strong occupational fundamentals.

We would suggest the retail warehouse market as an investment opportunity is therefore a better one than many think it might be. This may go some way to explain why the sector has never truly been viewed as an international asset class. The reason is perhaps again linked to geography. It is easier for a foreign investor to understand investment opportunities in traditionally more prominent asset classes across key major European cities. From a UK perspective, by the time a scheme reaches the table with the key decision makers, it is less likely that the senior managers making that decision will have the local site-specific knowledge and, ultimately, the confidence to invest in the sector outside of the UK’s top 10 retail destinations.

Of course, the promise of a general election and the likelihood of a new Labour government begs the question, ‘What will happen to market activity in the coming months’? We have tracked volumes across all asset classes at each of the general elections going back as far as June 2001. Historically, there tends to be a small fall in activity in the quarter before a general election: -3.7% on average as investors ‘wait and see’ if there is any dramatic change in the status quo immediately following the result. 

However, typically volumes then recover strongly by 13.0% on average, which coincides with an increase in positive consumer sentiment surrounding the optimism that comes with a new era of government. 

This is then closely followed by a dip in the first quarter after the general election of -8.4% on average as investors wait for the dust to settle and markets to stabilise. That said, this typically lays the groundwork for a strong second quarter of growth post the result, where investment volumes see an average 27.8% uptick as confidence in the investment markets returns.

If history is anything to go by, the retail warehouse sector will therefore see volumes dip once more, immediately following a post-election bounce. However, any fall is likely to be offset by stronger returns soon after, essentially ironing out the fluctuation in activity over the longer term. We therefore don’t see the potential vagaries to the expected election outcome being price-specific to the market but, wouldn’t be surprised to see a few exchanges delayed to just after the result, just in case.

_{Read the articles within Spotlight: UK Retail Warehousing below.}