West End sales performance remains mixed, with strong summer figures offsetting a softening in September
When it comes to West End sales performance, the mixed performance cited for Q2 has continued into Q3. The summer months of July and August were relatively strong, with New West End Company (NWEC) data noting that both months reported a 1% uplift in sales year on year (YoY), with August spend elevated by increased international tourist spend displaced from Paris in response to the Olympics. September would appear to have been more challenged with a 1.1% YoY contraction in sales, which was also reflected in footfall for the month. Despite this, year-to-date (YTD) spend in the West End remains positive, with sales up 0.4% compared to the same period in 2023.
International visitor spend remained a key driving force of total spend performance over Q3 with July and August reporting average annual increases of 5.4%. This growth slowed in September but remained in positive territory at 0.7%. With flight bookings to London up 13.4% and 7.7% YoY in November and December respectively, we expect international spend in the West End to accelerate, helped by the fact that bookings from high-spending markets in the Middle East and the US are up; markets that saw month-on-month declines in air passenger numbers in September.
Oxford Street has been a lead performer in the West End. In the nine months to September, according to NWEC data, sales were up 0.3%, followed by Regent Street which saw sales up 0.1%
Marie Hickey, Director, Commercial Research
Weaker domestic appetite continues to exert a drag on spend performance in the West End. According to NWEC, domestic spend performance has been in negative territory since June with Q3 being relatively flat, averaging -1.2% YoY. Notably, September reported a small acceleration in this decline to -1.5% YoY. However, we do expect to see this drag to dissipate in Q4 in response to slowing inflation and real wage growth. But, with consumer confidence remaining fragile, whether this means a ‘golden quarter’ to the scale seen last year remains to be seen and is likely to be dependent on how consumers feel in response to the Budget.
Oxford Street has been a lead performer in the West End. In the nine months to September, according to NWEC data, sales were up 0.3%, followed by Regent Street which saw sales up 0.1%. Performance over Q3 on both streets was relatively strong, boosted by an acceleration in spend in July and August, particularly on Regent Street, which we suspect was underpinned by robust international spend in the district and the more diverse profile of brands on both streets.
Bond Street, in contrast, has lagged this year suggesting it is feeling the impacts of the global slowing in luxury spend. Further to this, its YoY performance may also be a victim of super strong comparator months in 2023 and a recent strengthening in sterling that may be weighing on high-value product spend by international visitors. Despite the current headwinds facing the luxury sector, we are of the view these trends will dissipate as we move into 2025.
Vacancy continues to contract, albeit this is slowing in line with market normalisation
Despite the mixed sales performance across prime West End streets, occupier appetite remains strong. This has been reflected in a further contraction in vacancy to 3.2% across the prime streets in the West End, albeit the rate of contraction is slowing; down 40 basis points (bps) quarter-on-quarter (QoQ).
The limited supply of units continues to place upward pressure on rents, as with vacancy contraction this is also slowing reflecting the continued normalisation in the occupational market. Core West End prime headline ZA rents reported a 1.5% increase QoQ, 30 bps slower than the rate reported in Q2. On an annual basis this reflected a growth of 13.1% YoY.
Oxford Street was the only major street in the wider West End that reported an acceleration in rental growth in Q3; YoY growth for the western and eastern ends of the street averaged 19%. This reflects the constrained availability that now exists on the street with vacancy now standing at 2.7%, 90 bps down QoQ, meaning that vacancy is now at its lowest level since Q2 2019. With availability on the street to remain constrained going forward, we expect upward pressure on rents on the street to remain acute moving into 2025. The recent commitment to pedestrianise the street, which, judging by international case studies, has the potential to increase visitation and spend once complete, may amplify this.
Does the Budget pose a challenge to occupational demand?
While we believe there will be further rental growth across all key streets in the West End, the rate of this growth will continue to slow. This slowing may be exacerbated by the recent Budget announcements; increases to the minimum wage and employer National Insurance contributions will mean additional costs facing retail, F&B and leisure occupiers across Central London generating potential downward pressure on margins if these costs cannot be managed and/or passed onto consumers. This may weigh on occupiers’ confidence to secure new space, which in turn could mean a softening in competitive tension. But, for the best quality space, this is unlikely to be an issue.
With many occupiers taking a longer-term view, coupled with the fact that occupational costs (rents and Business Rates) in a number of prime locations remain below previous peaks, suggests that for well-configured flagship space, which is limited, occupier appetite will remain robust. For example, while Oxford Street rents reported growth in Q3 on the eastern and western ends of the street prime headline ZA rents are still, respectively, 21% and 36% lower than where they were at their last peak in Q4 2016. What is likely to have a more significant bearing is consumer response to the Budget, we will have to wait to see how this evolves over Q4.
Stock constraints weigh on investment activity, yet supply is set to improve
West End investment reached £86m in Q3, significantly down on the previous quarter which was elevated by Blackstone’s £430m Bond Street acquisition. The challenge to investment activity has been stock availability, but there are signs that this is starting to improve helped by falling debt costs and stronger occupational metrics, particularly on key streets in the West End. As a result, we anticipate investment activity to trend upward going forward.
As with previous quarters, with limited deal activity, there is little precedent to shift indicative prime yields. However, we anticipate some yield compression going forward, with Oxford Street likely to be primary beneficiary considering improving occupational performance and its all-time high yield spread to Bond Street.
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