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Retail Warehouse Dashboard Summary - Q3 2023

Core Content

This document provides a concise quarterly synopsis of activity in the UK retail warehousing market for Q3 2023. It highlights key trends in investment, capital values, rental growth, vacancy rates, and retail sales performance. Additionally, it includes insights from Knight Frank's research team and key contacts for further information.

Main Points

Investment Activity

• Retail warehousing investment volumes fell for the third consecutive quarter, reaching £423m, below the rolling 5-quarter average of £520m.
• Listed Property Companies (Prop Co's) were the dominant purchasers, acquiring more than 61.8% of assets by deal volume.
• Capital markets showed a disconnect from occupier markets, with yields increasing by +25 bps and capital values declining by -2.3% QoQ.
• Transactions slowed well below the 5-year average, partly due to elevated debt costs and limited activity from leveraged buyers.
• Interest rates remained stable at 5.25% for a second consecutive month, but rate cuts are unlikely in the near future, indicating a potential "higher for longer" scenario.

Vacancy Rates

• Unit vacancy rates improved by -30 bps, falling to 7.8%, the best quarterly rate since Q2 2019.
• Vacancy rates are now well below pandemic peak levels (11.5% in Q2 2021).
• Vacancy rates are now below pre-pandemic levels, showing a positive trend in market recovery.

Retail Sales Performance

• Retail sales were generally resilient, growing by +5.6% YoY.
• However, sales volumes are still impacted by inflation, which decreased by -2.0%.
• Performance by category was mixed, with softening demand for big-ticket items such as:
  • Computers & Telecoms: -11.5% YoY
  • Household Electricals: -2.2% YoY
  • DIY: -0.4% YoY
• Positive growth was observed in:
  • Sports Equipment: +1.4% YoY
  • Furniture: +7.2% YoY
  • Floor Coverings: +8.0% YoY

Rental Growth

• Rental growth strengthened marginally to +0.5% QoQ, indicating improving demand in certain locations.
• Positive rental pressure is building in under-supplied areas, with British Land raising its rental growth outlook to between +3% and +5%.
• Footfall fluctuated, but retail parks showed greater resilience compared to the broader retail sector:
  • July: +1.4% YoY
  • August: 0.0% YoY
  • September: -2.4% YoY

Market Outlook

• Retail Parks were the only retail sub-sector to see an increase in occupied units during H1 2023, driven by grocers, health clubs, and food-to-go operators.
• The demise of Wilko presented a significant opportunity for acquisition, given the lack of new development and low vacancy rates.
• Total returns for the RWH subsector in the 12 months to September 2023 were -7.6%, better than Industrial (-15.8%) and Offices (-18.9%).
• The disconnect between investment and occupier markets remains, but is less severe in retail warehousing than in other sub-sectors.

Key Deals YTD (Year to Date)

Research Commentary

• Consumer sentiment improved by +9pts during the quarter, and despite remaining negative, did not hinder retail sales growth.
• Shoppers' personal financial views improved by +39pts over the last 12 months, with a current sentiment of -2pts (versus wider economy -24pts).
• Operators expressed growing confidence, reporting better-than-expected trading and lower input costs, leading to raised profit guidance.
• High wages growth (+7.8%), historically low unemployment (4.3%), and easing inflation (6.3%) contributed to the positive trends.

Key Contacts

Capital Markets

• Dominic Walton
  Partner, Capital Markets
  +442078611591
  dominic.walton@knightfrank.com

• Daniel Serfontein
  Associate, Capital Markets
  +442036407037
  daniel.serfontein@knightfrank.com

• Josh Roberts
  Surveyor, Capital Markets
  +44 20 8187 8694
  josh.roberts@knightfrank.com

• Freddie MacColl
  Partner, Capital Markets
  +44 2039 677 133
  freddie.maccoll@knightfrank.com

Commercial Research

• Stephen Springham
  Partner, Head of Retail Research
  +442078611236
  stephen.springham@knightfrank.com

• Emma Barnstable
  Associate, Commercial Research
  +442081061385
  emma.barnstable@knightfrank.com

Research View

• Stephen Springham (Partner, UK Markets Research) notes that the disconnect between investment and occupier markets may be less severe in retail warehousing than in other sub-sectors.
• He also highlights that when investment markets return (expected in 2024), they will have something positive to return to.

Additional Information

• Knight Frank Research provides strategic advice, consultancy, and forecasting to a wide range of clients globally.
• All reports are subject to the Important Notice, which outlines the general informational purpose and disclaimer of liability.
• Reports can be accessed at: knightfrank.com/research