Colliers_Midsummer_Retail_Report_2015

NEW FRONTIERSMidsummer Retail Report 2015

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01 EXECUTIVE SUMMARY

01 Executive Summary02 Market Overview03 Economic Overview04 UK Lease Analysis

05 Investment Market06 Development Scene07 Food and Leisure Market08 Central London Market

09 Rating Revaluation10 Market Forecasts and Outlook11 Contacts

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LEVEL OF VACANTUNITS REMAINS

‘STUBBORNLY‛ HIGHAT 14.7%

RENTSSTABILISING AHEAD

OF GROWTH

INVESTORSUNDETERRED

...BUT NOT AS WE KNOW IT

IT'S RETAILING...

AFFIRMATIVE!

DISCOUNTRETAILING INFLUENCING

SALES VOLUMES

HOUSEHOLD SPENDING IS DRIVING ECONOMIC

PERFORMANCE

WAGE GROWTH,DEFLATION AND CONSUMER

CONFIDENCE

SOME RETAILERSARE PREPARED TO TAKE

15-YEAR LEASES

INCENTIVESHAVE DROPPED 31%

SINCE 2011

AVERAGE LEASELENGTHS AT AROUND

10 YEARS

CANCELLED FOODSTORE SCHEMES ARE CREATING

OPPORTUNITIES

RETAIL PARKS ARE ADAPTING TO A NEW

OCCUPIER MIX

DEVELOPMENT TO REACH FIVE-YEAR HIGH

IN 2017

£4.6BN OF OVERSEAS INVESTMENT

HIGH STREET INVESTMENT UP 30%

TO £2.39BN

DEBT FINANCE AND OVERSEAS

MONEY IS FUELLING THE MARKET

50 NEW CINEMAS TO OPEN BY 2017

UK-WIDE EXPANSION FOR RESTAURANT CHAINS

NEW LEISURECONCEPTS ADDING

TO THE MIX

SHARPEST FALLIN AVAILABILITY

SINCE 2007

80 NEW WESTEND RETAIL AND

FOOD BRANDS

PRIME RENTS ROSE BY 15%

INCREASED BILLS FOR LONDON

RETAILERS NEED TO TAKE

ADVICE

REGIONS TOBENEFIT MOST

TOTALRETURNS OF 10.8%

THIS YEAR

MORE SYNERGYBETWEEN ONLINE ANDPHYSICAL RETAILING

UK RETAIL RENTS ARE EXPECTED

TO RISE BY 1.4% IN 2015

COLLIERS INTERNATIONALMIDSUMMER RETAIL REPORT 2015

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• UK retail rents are expected to rise by 1.4% in 2015 with total returns of 10.8%

• The level of vacant units remains ‘stubbornly’ high at 14.7%

• Debt finance and overseas money are fuelling the investment market and driving yields down

• 2014 saw £4.6bn of overseas investment into UK retail property and the pace of investment is quickening

• Last year, investment into High Street retail property jumped by 30% to £2.39bn

• Average retail lease lengths are remaining relatively consistent at around 10 years

• London remains a ‘market apart’ with rental growth far ahead of the rest of the UK and vacancy rates well below the national average

• Last year saw the sharpest fall in vacant units in Central London since 2007, and prime rents rose on average by just under 15%

• Central London will continue to dominate the growth story with rents expected to grow by 7.7% in 2015 and by an average of 4.8% pa in the period 2015-2019

• Development to reach five-year high in 2017 with 6.9m sq ft of schemes

• Leisure and food are increasingly important in the shopping environments

• 50 new cinemas to open by 2017 and UK-wide expansion plans for restaurant chains

• Regions to benefit most from 2017 Rating Revaluation

• Increased rates bills for London

• More synergy between online and physical retailing

• Increased development activity will introduce a new generation of retail environments ■

EXECUTIVE SUMMARY

RENTS ARE NOW EITHERSTABLE OR RISING IN

89% OF THE LOCATIONSMONITORED

HEADLINE RENTS ONOXFORD STREET HAVE

BREACHED £1,000 ZONE A

IT IS A MARKET WHICHWILL REQUIRE EXPERIENCE

AND EXPERTISE

UK FUNDS ARE SELLING BECAUSE THEY'RE CONCERNED ABOUT

VACANCY RATES AND OVER-RENTING

INVESTMENT INTOHIGH STREET ASSETSJUMPED BY AROUND

30%

TO£2.39BN

ALDI AND LIDLCONTINUE TO EXPANDTHEIR PORTFOLIOS WITH STORE SIZES

GROWING

TO 25,000SQ FT

THE PREVALENCE OFBREAK OPTIONS MAY

INCREASE DURING 2015

PRIME UNIT VACANCY HAS REMAINED STABLE

AT c.7.5%

WE NOW HAVE A TWO-TIER MARKET

50 NEWCINEMAS ARE

FORECAST TO OPEN INTHE UK OVER THE NEXT

TWO YEARS

RETAILERS WILL ONLYTAKE THE RIGHT SPACEIN THE RIGHT PLACE

WE COULD SEE A FURTHER10% DROP IN INCENTIVES

DURING 2015

IN THE SECONDARYSHOPPING CENTRE MARKET,FAR MORE CAUTION NEEDS

TO BE EXERCISED

THE PRIME RESTAURANTMARKET IS MOVINGFORWARD AT AN

EXTRAORDINARY RATE

SCHEMES NEED TO BEEASY TO NAVIGATE...

UNITS MUST BEFLEXIBLE TO CATERFOR VARIED USES

OCCUPATIONAL COSTS WILL RISE WITH THE FORTHCOMING RATING

REVALUATION AND GLOBAL COMPETITION IS FIERCE

THE SHARPEST YIELDCOMPRESSION IS LIKELY

TO BE IN SHOPPINGCENTRES

THE COLLIERS INTERNATIONALMIDSUMMER RETAIL REPORT

IS THE DEFINITIVECOMMENTARY ON UK

RETAIL PROPERTY

A STABILISATION INTHE MARKET MAY BEAROUND THE CORNER

INDOOR TRAMPOLINING AND FREE JUMPING HAVE

BEEN WELL RECEIVED

IT IS ESSENTIAL THATALL RETAILERS SEEK

RATING ADVICE

THE DEMAND FORUK SHOPPING CENTRES

ASSETS IS PHENOMENAL

OPERATORS ARESELECTIVELY CONSIDERING

SHOPPING CENTRESFOR OPENINGS

LONDON RETAILLOCATIONS WILL FACEAN INCREASED BURDEN

RENTAL VALUES ARE EXPECTED TO RISE BY

A MODEST 1.4%

SOME RETAILERS AREPREPARED TO COMMITTO 15-YEAR LEASES

LEASE TRENDS POINT TO A MORE STABLE AND

IMPROVING MARKET

THE PRESENT OPPORTUNITIES FOR

PRODUCTIVE SPECULATION ARE CONSIDERABLE

THE OPPORTUNITIES ARE CLEAR AND UNDENIABLE

HALF OF THOSESURVEYED HAD

EXPERIENCED PROBLEMSWITH THEIR

ONLINE ORDERS

02 MARKET OVERVIEW

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OF GROWTH

INVESTORSUNDETERRED


IT'S RETAILING...

AFFIRMATIVE!


SALES VOLUMES


PERFORMANCE


CONFIDENCE


15-YEAR LEASES


SINCE 2011


10 YEARS


OPPORTUNITIES


OCCUPIER MIX


IN 2017



TO £2.39BN






TO THE MIX


SINCE 2007


FOOD BRANDS




ADVICE



THIS YEAR




GREG STYLESHead of Retail Development

MARK CHARLTONHead of Researchand Forecasting

JOHN WEBBERHead of Rating

JAMES WATSONHead of UK Retail Investment

ROSS KIRTONDirector

– Licensed & Leisure PAUL SOUBERHead of Central London

Retail Agency

MARK PHILLIPSONHead of UK Retail Group

DAN SIMMSHead of RetailAgency – South


The theme of last year's Midsummer Retail report was 'Comingup for air' which seemed appropriate for a sector which hadfelt predominantly underwater for the previous seven years.

However, in the 12 months since we last reported, there hasbeen much to feel positive about.

The sector has moved forward, and that is why our theme forthis year's report is 'New Frontiers'. We've given the documenta retro space age feel because, in many respects, the journeyinto the new age of retailing feels every bit as uncharted territory as outer space felt 50 years ago. Our aim is to provide insights into both the sector as it stands today andwhere it is heading.

To do this we track rental movements in 421 UK locations andalso monitor vacancy across 15 representative shopping pitches.

Progressive rental levels are a key indicator of occupier demand, and reinforce the investment case for the sector.

However, at present, aside from Central London and someselected locations, rental growth remains very muted. ➝

Average prime rents growthMay 2014-May 2015

Central London 14.9%

Outer London 5.1%

East Midlands 0.0%

Eastern 0.2%

North East -0.4%

North West -0.1%

Scotland 0.0%

South East -0.2%

South West 0.3%

Wales 0.0%

West Midlands -4.0%

Yorkshire and Humberside 0.4%


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EXPLORING THE NEW FRONTIER




Source: Colliers International

On average, if you include Central and Outer London, there was about 1.4% growth in prime retail rents across the UK inthe year to the end of May. If you exclude London, then primerents have decreased on average by 0.3% during the corresponding period.

Encouragingly, however, rents are now either stable or rising in 89% of the locations monitored – that's the amber and greensections of this chart. This is up from 78% in the previouscorresponding period – an uplift of 11%.

It is this growing stabilisation of rents which is encouraging,as it will ultimately prepare the ground for further – modest – rental growth. So whilst we are still some way from seeinggenerally progressive rents outside of London, there is a clearpicture of a sector stabilising ahead of moving forward.

And that is a big improvement. ➝

0

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15

Apr–09

Oct–09

Oct–10

Apr–10

Oct–11

Apr–11

Oct–12

Apr–12

Oct–13

Apr–13

Oct–14

Apr–14

Apr–15

0%

5%

10%

15%

20%

25%

UK net effective prime zone A rental performance 2005-14


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Centres with rising rentsCentres with stable rentsCentres with falling rents










AND EXPERTISE




30%

TO£2.39BN


GROWING

TO 25,000SQ FT




AT c.7.5%


50 NEWCINEMAS ARE


TWO YEARS



DURING 2015


TO BE EXERCISED


EXTRAORDINARY RATE









RETAIL PROPERTY



BEEN WELL RECEIVED


RATING ADVICE







A MODEST 1.4%



IMPROVING MARKET






ONLINE ORDERS

In this context, the benefit that the 2017 rating revaluationmay eventually bring to various locations outside of London – in the form of reduced business rates liabilities – could addfurther impetus to leasing activity and selective rental growth.

With regard to shop voids, overall, the number of vacant unitsacross the UK's shopping pitches remains stubbornly high at 14.7%.

This is slightly up from 13.6% in October of last year and asyou can see from this schedule of the locations we monitor,the vacancy spread ranges from just 1.2% on London's OxfordStreet to double digit percentage voids in all but three of theother locations.

Prime unit vacancy has remained stable at c. 7.5% since April2014, while non-prime vacancy has seen an increase from16.4% to 16.9%. ➝


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UK vacancy rates sample

Bournemouth 13.8%

Cardiff 11.4%

Chippenham 5.2%

Dundee 18.0%

High Wycombe 15.6%

Ilford 10.5%

Kensington High Street 2.1%

Lisburn (NI) 22.9%

Liverpool 11.8%

Northampton 13.7%

Oxford Street 2.5%

Plymouth 11.5%

Rotherham 19.7%

Worcester 11.8%

Sample Average 13.0%

11.9%

11.5%

5.6%

15.9%

14.6%

14.7%

0.7%

22.7%

12.4%

17.3%

0.4%

13.4%

16.4%

15.3%

13.6%

14.7%

Apr 14 Oct 14 Apr 15

12.7%

8.3%

16.2%

18.2%

9.5%

2.2%

26.8%

14.9%

17.1%

1.2%

14.3%

17.1%

12.9%

14.7%










AND EXPERTISE




30%

TO£2.39BN


GROWING

TO 25,000SQ FT




AT c.7.5%


50 NEWCINEMAS ARE


TWO YEARS



DURING 2015


TO BE EXERCISED


EXTRAORDINARY RATE









RETAIL PROPERTY



BEEN WELL RECEIVED


RATING ADVICE







A MODEST 1.4%



IMPROVING MARKET






ONLINE ORDERS

The non-prime trend reflects the over-provision of shoppingand obsolescent units in towns and cities across the UK,which is creating 'sticky' space – and by that we mean, shopsthat have little prospect of letting.

With their more conservative expansion plans, retailers willonly take the right space in the right place.

This is underlined by the fact that we are now seeing newshopping developments which will find occupiers, while hugeswathes of existing stock remain empty.

If you looked at this rental growth and vacancy picture in isolation, it would be understandable to expect an entirely dismal investment market.

However, for reasons not connected with the usual propertymetrics, this is most definitely not the case.

Similarly, with virtually no rental growth and persistently highvoids, you would hardly expect anyone to be rushing to developnew shopping space.

But in fact development is on the move, and we are headedfor a cycle-high peak of activity within the next two years. ■

Such a paradoxical state of affairs is indeed a 'New Frontier'.

Certainly it is a market that none of us have experienced be-fore.

0

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15

Apr–09

Oct–09

Oct–10

Apr–10

Oct–11

Apr–11

Oct–12

Apr–12

Oct–13

Apr–13

Oct–14

Apr–14

Apr–15

0%

5%

10%

15%

20%

25%

Vacancy rate by pitch


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Non-prime unitsPrime units










AND EXPERTISE




30%

TO£2.39BN


GROWING

TO 25,000SQ FT




AT c.7.5%


50 NEWCINEMAS ARE


TWO YEARS



DURING 2015


TO BE EXERCISED


EXTRAORDINARY RATE









RETAIL PROPERTY



BEEN WELL RECEIVED


RATING ADVICE







A MODEST 1.4%



IMPROVING MARKET






ONLINE ORDERS

03 ECONOMIC OVERVIEW

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OF GROWTH

INVESTORSUNDETERRED


IT'S RETAILING...

AFFIRMATIVE!


SALES VOLUMES


PERFORMANCE


CONFIDENCE


15-YEAR LEASES


SINCE 2011


10 YEARS


OPPORTUNITIES


OCCUPIER MIX


IN 2017



TO £2.39BN






TO THE MIX


SINCE 2007


FOOD BRANDS




ADVICE



THIS YEAR








ROSS KIRTONDirector


Retail Agency




What a difference a year makes!

A new government, increasing real wages, affordable fuelprices, deflation and house prices within 10% of peak pricingin many locations. Consumer confidence is high and the savingsratio is down – that adds up to ringing tills.

Fortunes may be mixed across the retail sector, there appear to be more winners than losers, although the winners maynot be winning by as big a margin and the losers don't seemquite as overwhelmed, as in the past.

So what is driving this slightly confused picture?

One fact remains constant: the economy has not rebalancedin any significant way despite the improved fortunes of UKmanufacturers. Analysing the data, it is clear that domesticmanufacturing is being driven more by domestic consumptionthan by improved exports, as is the distribution and logisticssector.

The top level expenditure contributions to economic performancestill show that the economy is based mostly on householdspending, which accounts for around 60% of UK economicoutput, with retail spending being roughly half of that 60%. ➝


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THE ROAD AHEAD




17%

20%

-2%

61%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Apr-

08

Apr-

09

Apr-

10

Apr-

11

Apr-

12

Apr-

13

Apr-

14

Apr-

15

Retail sales de!ator

Discounting

Excl. fuel

Household spending is still the key to economic performance

Household spendingNet exports

Government spendingInvestment

% contribution to GDP

Source: ONS

Vital investment (i.e. capital formation) may be making a comeback, but only in fits and starts.

Perhaps with a stable government, business will find newconfidence, and investment in productive assets will find new traction and drive UK economic performance forward.And maybe this will give a boost to tax receipts and we can close the final chapter on austerity and move on.

This chart shows where we have been and the new direction of travel.

At 2.3% y/y growth in Q1 2015, it looks as though householdspending is at the pre-recession levels of 2006 and 2007, butalso looks to have the stability, if not quite the strength, of theearly 2000s.

Looking at the key drivers of UK retail, or the UK retail performance equation, suggests that this stability may be with us for a while longer. ➝


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10

2%

1%

0%

-1%

-2%

6%

4%

2%

0%

-2%

-4%

-6%

Nominal

Real

% q/q (RHS)

% y/y (LHS)

8

6

4

2

0

-2

-4

-6

-8

-10

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Q1-01 Q1-02 Q1-03 Q1-04 Q1-05 Q1-06 Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Q1-12 Q1-13 Q1-14 Q1-15

Aver

age

Wee

kly

Earn

ings

(% c

hang

e Yo

Y)

Household spending steady

Source: ONS

Low in�ation/de�ation

Low interest rates/mortgage rates

Real wage growth

House price growth

Con�denceLow saving ratioHousehold spendingBuoyant retail sales‘Big Ticket’ items


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Domestic economic drivers of UK retail performance are linked to two key factors:

• Low inflation

• Low interest rates

These factors have impacted the retail market through a few notable channels:

• First, low inflation (or most recently modest deflation) has driven real wage growth into positive territory and hasstrengthened household confidence and disposable income

• Secondly, low interest rates have led to low mortgage rates,which has led to more money in the pockets of borrowers

• Thirdly, low mortgage rates have supported demand in thehousing market, driving up house prices and thus bringinggreater confidence to home owners through the 'wealth effect'

It is hard to say which of the factors is most important. But one candidate must be real wage growth, moving into positive territory in September 2014 for the first time in six years. ➝

The UK retail performance equation

Low inflation/deflation

Low interest rates/mortgage rates

ConfidenceLow saving ratioHousehold spendingBuoyant retail sales‘Big Ticket’ items

Real wage growth

House price growth

The solid line shows wages before inflation. The dotted lineshows real wages – that is wages after inflation is taken into account.

Real wages reached a 4.5% y/y growth rate in March, thehighest level since March 2007. It is also hard to see how UKinterest rates can rise until this vital indicator is stable and ona firmer upward trajectory.

A second candidate for the most important factor driving retail sales is low mortgage rates. ➝

10

2%

1%

0%

-1%

-2%

6%

4%

2%

0%

-2%

-4%

-6%

Nominal

Real

% q/q (RHS)

% y/y (LHS)

8

6

4

2

0

-2

-4

-6

-8

-10M

ar-0

5

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Q1-01 Q1-02 Q1-03 Q1-04 Q1-05 Q1-06 Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Q1-12 Q1-13 Q1-14 Q1-15

Aver

age

Wee

kly

Earn

ings

(% c

hang

e Yo

Y)

Real wage growth contributing to consumer confidence


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Source: ONS

Clearly if you have re-mortgaged recently you will have seen a significant difference in payments. In 2007, the interest rateon a 75% LTV 2-year fixed mortgage was 6%. Now it is 1.95%.If you had a mortgage payment of £1000 per month in 2007,now it is probably £650. That is releasing extra spendingpower of £350 each month.

Also low mortgage rates support the housing market by increasing the amount people can pay for houses. In fact, houseprices outside London and the South East have now recoveredto broadly within 10% of the last peak, although there are stillone or two areas that are lagging. The regional fortunes of retailers are intrinsically linked to this simple wealth indicator.

However, there is one additional candidate for the key driverof retail, separate to our more generic retail performanceequation. ➝

17%

20%

-2%

61%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Apr-

08

Apr-

09

Apr-

10

Apr-

11

Apr-

12

Apr-

13

Apr-

14

Apr-

15


Discounting

Excl. fuel

-60%

-40%

-20%

0%

20%

Yorkshire

&

Humberside

North

West East

Midlands West

Midlands East South

West South

East London Wales

Scotlan

d Northern

Ireland UK

Regi

onal

hou

se p

rices

com

pare

d to

200

7 pe

ak

‘Wealth effect’ returning to some regional markets


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Source: Halifax

The missing element is discounting – and this means that despite improved economic conditions, retailers do not have it easy.

On the contrary, the chart opposite suggests that to increasesales volumes you must cut prices and squeeze your operatingmargins. Increasingly, this looks to be a permanent feature of the market.

This may reflect the impact of online operators who can potentially leverage a more efficient cost base to keep priceslower than traditional shops.

It may also reflect the dramatic rise of pound shops and discount business models that are causing dislocation, particularly in the supermarket sector.

It may also represent a shift in customer appetite and a newsense of value and service expectations since the recession.

Most likely it is a combination of all of these factors. ■

17%

20%

-2%

61%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Apr-

08

Apr-

09

Apr-

10

Apr-

11

Apr-

12

Apr-

13

Apr-

14

Apr-

15


Discounting

Excl. fuel

Discounting is key to sales volumes


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Source: ONS

04 UK LEASE ANALYSIS

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OF GROWTH

INVESTORSUNDETERRED


IT'S RETAILING...

AFFIRMATIVE!


SALES VOLUMES


PERFORMANCE


CONFIDENCE


15-YEAR LEASES


SINCE 2011


10 YEARS


OPPORTUNITIES


OCCUPIER MIX


IN 2017



TO £2.39BN






TO THE MIX


SINCE 2007


FOOD BRANDS




ADVICE



THIS YEAR








ROSS KIRTONDirector


Retail Agency




In recent years we have seen some huge changes in a volatile retail market.

To get a detailed insight into the market, Colliers analysesevery leasing deal in which the Retail team is involved. Thisincludes around 500 new lettings each year across the UKand gives authoritative data to help identify leasing trendsacross all sectors and regions in the UK retail property market.

Lease lengths stable

One aspect of the leasing model that has sidestepped marketturbulence is lease lengths which have remained stable.

The average figures for the last six years show that leaselengths have remained relatively consistent, with the averagebottoming out at 9.5 years in 2009 and improving slightly to justbelow 10 years in 2014.

The regional data shows very little evidence of a North/Southdivide as everywhere, including Central London, remain closelyaligned. ➝


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INCENTIVES SHRINK AS RETAILER CONFIDENCE GROWS

0

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12

Central London

Year

s

North South Overall UK

0

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12

Central London

Mon

ths


010%20%30%40%50%60%70%80%

Central London

Mon

ths


010%20%30%40%50%60%70%80%

Overall UK

Mon

ths

High Street Shopping Centre Out of Town

0

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s


0

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Mon

ths


Lease length profile by region

20092010

20112012

20132014





However, initial data collected in 2015 is showing slight signsof growth beyond 10 years as some retailers are prepared tocommit to 15 year leases – albeit with underlying break clauses.

When you look at the data across the sectors, there are somekey differences, with the shopping centre sector doing dealswith the shortest lease lengths for the sixth consecutive yearto the end of 2014. So far in 2015 it looks unlikely that thegap to the other sectors will be bridged.

At the same time we expect High Street and particularly Outof Town leases to continue to be slightly longer – averagingout just above 10 years. ➝


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0

2

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8

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12

Central London

Year

s


0

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Central London

Mon

ths


010%20%30%40%50%60%70%80%

Central London

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ths


010%20%30%40%50%60%70%80%

Overall UK

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ths


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s


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3

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Mon

ths


Lease length profile by sector

20092010

20112012

20132014










AND EXPERTISE




30%

TO£2.39BN


GROWING

TO 25,000SQ FT




AT c.7.5%


50 NEWCINEMAS ARE


TWO YEARS



DURING 2015


TO BE EXERCISED


EXTRAORDINARY RATE









RETAIL PROPERTY



BEEN WELL RECEIVED


RATING ADVICE







A MODEST 1.4%



IMPROVING MARKET






ONLINE ORDERS

Break options remain a fixture

Break options in leases became an established feature of themarket from 2008-2009 onwards.

The prevalence of breaks as an average across the UK hashardly changed in the last four years at just over 50%.

However, as lease lengths look set to increase a little on theHigh Street and Out of Town, the data for 2015 suggests thatthe prevalence of break options may follow suit and increaseduring 2015.

Across the sectors, the figures for shopping centres dipped in 2014 to create a similar set of results to the High Street, withOut of Town again showing comfortably the lowest frequency.

The data for 2015 is, however, showing signs of an increasein frequency across all sectors – if this continues for the fullyear of 2015 this will mark a change to the stable pattern of recent years. ➝


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0

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12

Central London

Year

s


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Central London

Mon

ths


010%20%30%40%50%60%70%80%

Central London

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ths


010%20%30%40%50%60%70%80%

Overall UK

Mon

ths


0

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6

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s


0

3

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Mon

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Break option prevalence by sector

20092010

20112012

20132014

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12

Central London

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s


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Central London

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ths


010%20%30%40%50%60%70%80%

Central London

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ths


010%20%30%40%50%60%70%80%

Overall UK

Mon

ths


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12

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s


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Break option prevalence by region

20092010

20112012

20132014




Source: Colliers International Source: Colliers International






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Incentives shrinking

Incentives are a key measure of the market and certainly themost sensitive to change.

Incentives peaked in 2011 and there’s been a steady reductionever since, resulting in a drop of 31% by the end of 2014.

This trend looks set to continue and we could well see a further drop in incentives of 10% or more during 2015.

The shift in the shopping centre sector has been even moremarked, where the average incentive for 2011 of 13.6 monthsdropped by 33% to 9.1 months in 2014 – and is looking set to reduce even further in 2015.

In general, we are seeing the gap narrowing between thethree sectors as the incentives packages gradually converge.

This is certainly not the case when you look at the regionaldata, where London leads the way by quite some margin – with incentives at almost a third of the rest of the UK.

Even with some improvements for the North and South in2015, the London averages are still likely to be 50% below the other regions. ➝


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Central London

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Central London

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010%20%30%40%50%60%70%80%

Central London

Mon

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010%20%30%40%50%60%70%80%

Overall UK

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Lease incentives by sector

20092010

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Where are leases headed?

There have definitely been some improvements in the last year,and the lease trends point to a more stable and improving market.

Across the sectors, the data shows shopping centres becomingmore closely aligned with High Street and Out of Town andnarrowing the performance gap that has been evident in recent years.

Across the regions, London continues to lead the way on incentives and break options while North and South are nowclosely aligned on most measures.

Increased occupier demand, leases edging up in length andthe reduction in incentives can begin to create pricing tensionand prepare the ground for future rental growth – althoughthis will remain constrained to particular locations. ■


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8

10

12

Central London

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2

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8

10

12

Central London

Mon

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010%20%30%40%50%60%70%80%

Central London

Mon

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010%20%30%40%50%60%70%80%

Overall UK

Mon

ths


0

2

4

6

8

10

12

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s


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3

6

9

12

15

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Lease incentives by region

20092010

20112012

20132014









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AT c.7.5%


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ONLINE ORDERSSource: Colliers International

05 INVESTMENT MARKET

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OF GROWTH

INVESTORSUNDETERRED


IT'S RETAILING...

AFFIRMATIVE!


SALES VOLUMES


PERFORMANCE


CONFIDENCE


15-YEAR LEASES


SINCE 2011


10 YEARS


OPPORTUNITIES


OCCUPIER MIX


IN 2017



TO £2.39BN






TO THE MIX


SINCE 2007


FOOD BRANDS




ADVICE



THIS YEAR








ROSS KIRTONDirector


Retail Agency




The recurrent theme that runs through the retail property investment sector at present is the increasing availability of debt finance and the increasing influence of debt-backedinvestors.

Debt is most certainly back in the market. And if the return of cheap debt is a sure sign of a bull market then that is definitely what we've got.

Senior debt is now commonly available with loan-to value ratios of more than 70% – and when you combine that withmore freely available finance, it's clear how it is influencingbuying in the market.

That would be enough to move the market in normal circumstances but when you also consider the extraordinaryamount of foreign capital that continues to target the UK; youget a feeling for how much money is chasing retail propertyinvestments.

Last year, there was £4.6bn of overseas investment into UK retail property. While this was almost on a par with 2013,the trend appears to be quickening. There has already been£2.8bn of foreign spending on UK shopping this year whichputs the sector on course to exceed £5bn of spending in 2015. ➝


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DEBT SHAPES MARKET AS INVESTORS TURN TO BULLS

2013

£4.3bn £4.6bn

£2.8bn

2014 2015 YTD2011

£2.1bn£1.5bn

£2.6bn£3bn

2012 2013 2014

2009-10-505101520

2010 2011 2012 2013 2014

Total CapitalValue – £m

2010 2011 2012 2013 2014 2015 YTD0

200400600800

100012001400160018002000

Overseas investment into UK Retail Property




Source: RCA

The All-Retail IPD equivalent yield hardened in Q1 and thisdownward trend is expected to continue. We are forecastingan inward movement of 26 points for the All-Retail yield bythe end of 2015. The sharpest compression is likely to be in shopping centres (40 basis points) followed by standardshops (32bp) and retail warehouses (26bp).

Retail warehousing

With regard to where the debt buyers are having an impact,the retail warehouse sub-sector is a case in point.

UK funds are selling because they're concerned about vacancy rates and over-renting.

Their assets are being snapped up by property companieswhose cheap debt is helping purchases show an attractive return on day one with the hope of an asset management play further down the line.

Interestingly, many of these property companies were previouslyoperating in the shopping centre sector but are switching sectorsin order to deal with many of the same occupiers but for better returns. ➝


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2013

£4.3bn £4.6bn

£2.8bn

2014 2015 YTD2011

£2.1bn£1.5bn

£2.6bn£3bn

2012 2013 2014

2009-10-505101520

2010 2011 2012 2013 2014


2010 2011 2012 2013 2014 2015 YTD0

200400600800

100012001400160018002000

UK retail warehouse transaction volumes










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Last year just over £3bn of retail warehouse assets were tradedand we look on the way to exceeding that in 2015.

So far this year there's been around £900m of transactions in the sector which is well ahead of the £750m transactedduring the same period in 2014.

Retail warehousing continues to be one of the best performersof the retail sub-sectors returning a total return in 2014 of 14.5%.

Not surprisingly, there has been yield compression over the last12 months of around 50 basis points, particularly for prime,Open A1 shopping parks, of which few have come to the market.

Shopping centres

There cannot be a better example of a sector that in a relativelyshort time-frame has gone from untouchable to must-have.

The demand for UK shopping centres assets is phenomenal – and is coming from across the board. Institutions are awashwith money through their unit trusts, and are trying to put fundsin the market but finding it incredibly competitive.

There are the opportunistic private equity buyers who are increasingly aggressive bidders, using an abundant supply of debt to leverage returns.

And then there are the global institutional investors that areentirely focused on parking money in assets which enablethem to match future liabilities.

Until 2014, the level of UK shopping centre buying was mutedby concerns over the occupier market and how much demandthere was from retailers for mall space. Since the second halfof last year, those concerns appear to have been supersededby a bigger investment imperative. ➝


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Value enhancements are reflected in total returns which last yearreached 14% after something of a rollercoaster ride duringthe recession.

The reality now is that many centres are not being bought onthe basis of property fundamentals and long-term prospects,but purely because they are throwing off an attractive entryyield relative to other investment classes. With loan-to-valueratios of 70%+ and the all-in cost of finance for interest-onlyfacilities frequently less than 3.5%, it is easy to see why somany investors are heading down this route.

The positive arbitrage available relative to shopping centreyields at, say, 6%, means that debt is once again significantlyaccretive to returns.

However, a really strong investment case can only be made forthe prime, regionally dominant assets which are underpinnedby their market position, their critical mass and the alignmentof landlords and tenants in creating exciting experience-basedenvironments.

In the secondary market, far more caution needs to be exercised. Retailer portfolios remain under review and tenantsare negotiating aggressive capital intensive renewal packageson ever shorter lease terms. Some shopping centres andtown centres are arguably in structural decline. ➝


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2013

£4.3bn £4.6bn

£2.8bn

2014 2015 YTD2011

£2.1bn£1.5bn

£2.6bn£3bn

2012 2013 2014

2009-10-505101520

2010 2011 2012 2013 2014


2010 2011 2012 2013 2014 2015 YTD0

200400600800

100012001400160018002000

Shopping centre total returns 2009-2014% year-on-year




Source: IPD/MSCI






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However, in a sector which generated an average return of14% last year, it is not hard to see why transaction volumespassed £6bn last year and should do the same this year.Yields – for the best regionally dominant centres are nowback to 4%. Within London, they are moving towards 3.5%.

For example, the N1 Centre in London's Islington was broughtto the market at £140m and ended up selling for over £170m– a sub-4% net initial yield. The Grafton Centre in Cambridgewas marketed at £92m and attracted a clutch of bids over£100m.

There is every indication this level of demand in the shoppingcentre Sector will continue.

The High Street

Not that long ago the received wisdom seemed to be that UKHigh Streets were either dead or dying.

However, if that is the case, it appears that no one has told investors. Last year, investment into High Street assetsjumped by around 30% to £2.39bn.

Not surprisingly, a lot of that buying is either within the M25or in one of the country's 'cathedral cities', but there is anever-growing investor base who are prepared to put moneyinto local shopping streets around the UK.

By midsummer, the weighted average net initial yield hadmoved in to 5.71% from 6.2% last year.

With transactions running at £623m by the end of May, it lookslike the sector is set to replicate the transactional volumes of2014. And with fewer retailer failures and store requirementsbeginning to increase, the sector is edging its way to recoveryand we do not see pricing across the High Street softening in the short-term.

A lot of this improved outlook is actually being driven not bypure retail offers, but by the food and beverage sector. Our desireto 'graze' while we shop has seen a significant increase in coffeeshops, restaurants, bars and grab-and-go convenience foodoutlets throughout the UK's High Streets.

Given that F&B operators tend to take long leases, this hasresonated with investors who are keen to lock into long-termincome. ➝


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Supermarkets

The sector of the retail property investment market which has,in recent times, offered the longest dated income and bestperformance has been supermarkets. But that was before a newera of diminishing margins, the advent of the discounters andhaving to service non-profitable online food shopping.

The troubles of the supermarket sector have been well-documented but in the context of the property marketwhich underpins the sector, we think they have been exaggerated.We now have a two-tier market which is something the investment sector needed.

The top tier is prime, healthy stores let on long, RPI-linkedleases and usually owned by institutions. Demand for thisproduct remains strong. Then there are secondary, flawedstores that still have the benefit of long leases, where yieldsare moving out fairly rapidly. These are increasingly a targetfor debt-backed private equity.

At a time when we're seeing a certain amount of indiscriminatebuying of retail assets, supermarkets continue to have a clearinvestment case. They have a reason to be. Despite an inherentlevel of over-rent, the majority continue to make good moneyfor their occupiers, and offer the strongest covenants availablein the retail sector. That proposition with a yield of 4.5% stilllooks very attractive.

In 2014, transactional investment volumes were £1.3bn andUK supermarkets provided investors with a total return of 7% year-on-year. ➝


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2013

£4.3bn £4.6bn

£2.8bn

2014 2015 YTD2011

£2.1bn£1.5bn

£2.6bn£3bn

2012 2013 2014

2009-10-505101520

2010 2011 2012 2013 2014


2010 2011 2012 2013 2014 2015 YTD0

200400600800

100012001400160018002000

Supermarket transactions in 2014

Sainsbury’sMorrisons

AsdaTesco

Waitrose OtherM&S










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Outlook

In terms of giving a market outlook, the first thing to do isseparate out London because it truly remains ‘a market apart'.

There has been phenomenal demand for London retail propertyfrom occupiers and investors alike and we've seen rents rocketwhile yields have steadily tracked down.

Naturally, an arc such as this can't continue indefinitely and thereare now some indications that a stabilisation in the market maybe around the corner. This is particularly true of rents in someestablished prime pitches.

In the wider market, UK institutions must be viewing the investorlandscape with relish as they have an opportunity to trade outof some assets – most notably shopping centres – and redeploythe capital with advantage.

The fervent desire of many investors to place large chunks ofmoney into the market we think will give rise to an increasingnumber of portfolio sales.

Buying in bulk

Paradoxically, whereas buyers usually expect a discount forbulk purchases, in the property portfolio market we are seeinginvestors pay a premium for the opportunity to park hundredsof millions of pounds in one hit.

The elbow room that makes that sort of strategy possibletends to be debt and, once again, the market has to recognisewhen a deal is not being driven by property fundamentals.

If you try and read-across from a portfolio sale to the pricing of an individual asset you are unlikely to be in sync with the market. ➝


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Overseas buyers eye the regions

We have by no means seen the end of the influx of overseascapital into the retail property sector. Initially that buying hasbeen targeting London and large shopping centres, but we arealready seeing a ripple effect with buying in regional centresstimulated by the yield gap.

For this second wave of capital, the new frontiers are going to be the likes of Manchester, Birmingham, Leeds and Bristol.

That has got to be good news for the regions and also in termstaking some of the heat out of a very hot market in London.

What is prime?

I think we must now all reshape our understanding of what isprime in the retail property sector. It is a much narrower bandnow compared to where it was prior to the financial crash.

There was a time when you could find prime retail property in just about every UK city. These were assets which showedinstitutional characteristics and an income/yield profile whichwas aligned to that.

Today you could say that in the retail property sector there areonly two sorts of assets that could be strictly defined as prime:the best assets in core London and south east locations, andalso a handful of regionally dominant city centres.

Everything else needs to be forensically evaluated and thatmakes both buying and enhancing value a more complexprocess than in the past.

However, the present opportunities for productive speculationare considerable. ■


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ONLINE ORDERS

06 DEVELOPMENT SCENE

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OF GROWTH

INVESTORSUNDETERRED


IT'S RETAILING...

AFFIRMATIVE!


SALES VOLUMES


PERFORMANCE


CONFIDENCE


15-YEAR LEASES


SINCE 2011


10 YEARS


OPPORTUNITIES


OCCUPIER MIX


IN 2017



TO £2.39BN






TO THE MIX


SINCE 2007


FOOD BRANDS




ADVICE



THIS YEAR








ROSS KIRTONDirector


Retail Agency




Since peaking in 2008, the development of retail space in theUK has been on a gradual decline and reached a low point in 2014.

However we are now seeing a significant uplift in developmentactivity which is projected to produce a likely peak in 2017when around 6.9m square feet is due for delivery.

Shopping centres

There are numerous projects which are not only on site butdue to open during this year and next.

Schemes Opening in 2015

• Bradford, Westfield – 400,000 sq ft• Birmingham, Grand Central Arcade – 500,000 sq ft • Beverley, Flemingate Shopping Park – 163,000 sq ft • Hinckley, The Crescent – 200,000 sq ft• Newport, Friars Walk – 350,000 sq ft

Schemes Opening in 2016

• Chelmsford, Bond Street – 277,000 sq ft • Leeds, Victoria Gate – 366,000 sq ft• Southampton, Watermark – 260,000 sq ft ➝


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BACK ON SITE – AND BUILDING

0

1

2

3

4

5

6

7

8

1999

sq ft

(mill

ions

)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Development pipeline

Retail warehousingShopping centres




Source: PMA/Local Authorities/Colliers International

The changing nature of occupier and shopper demand is shapinga new generation of development which has distinctive characteristics.

The over-arching aim is to keep shoppers on site longer to increase spending. This often means offering more food andleisure facilities. Schemes also need to be simple and easy to navigate while units must be flexible enough to cater forvaried uses.

For smaller town centre schemes, there is a move to incorporateopen air environments or partially covered facilities. This helpsreduce construction costs for owners and service charges for occupiers.

Out of Town

The Out of Town retail sector is a continuingly changing picture both in terms of occupier demand and developmentdesign.

A decade ago, the average retail park was a mix of DIY, furniture,electrical and carpet sheds. Today there is a much more eclecticmix of brands and consumer options as wider planning permissions are allowing new and different forms of retail to enter the market.

The discount retail brands are at the forefront of this and aretaking up an increasing amount of retail park space. There isalso a resurgence of demand from the furniture and homefurnishings sector.

With rents ‘re-booting’ to sustainable levels, many retailershave now increased their store requirements, and we are alsoseeing different approaches among the latest schemes with a greater emphasis on food outlets and also retailers requiringmezzanine space which is increasing the required height of units.

Supermarkets

One of the biggest stories in the retail sector in the last couple of the years has been the trials and tribulations of the foodstore sector.

Following the ‘race for space’ that continued for some years,the Big Four supermarket operators have dramatically scaledback their expansion plans with very few new store developments now being progressed.

As the operators have become embroiled in price cutting,opening new stores has taken a back seat. ➝


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EXTRAORDINARY RATE









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ONLINE ORDERS

The result is that many planned stores are not being built or, indeed, opened where these is no obligation to do so.Where development contracts expire before conditions aresatisfied, it is the developers or landowners who are left withthe site.

However, the operators themselves, particularly Tesco andSainsbury’s, have quite a few sites that they are now lookingto sell rather than progress store development.

Ranging from whole town centres, such as Tesco’s holding inKirkby in Merseyside, to small plots of land adjacent to existingstores that were originally bought to enable extensions, theassets being sold are widely varied.

These disposal programmes will create great opportunities forthe rest of the market – from investment and asset managementopportunities to vacant development sites that may end upbeing retail, residential or both.

So is supermarket development dead for the foreseeable future?The answer is most certainly no.

However, for the immediate future it is all about quality sitesin the operators ‘white space’ locations that are available atthe right time or alternatively some unique propositionswhere significant drivers exist alongside retail.

For example, Sainsbury’s have recognised the opportunity toleverage their London portfolio by taking advantage of the SouthEast residential boom. At Fulham Wharf, they have progresseda development which has seen Barratts create a major residentialscheme next to a new Sainsbury’s store.

Among the discounters, Aldi and Lidl continue to expand their portfolios with store sizes growing to 25,000 sq ft inmany target locations. However, they are not having it all to themselves in this sector with the re-emergence of Nettoin the UK as a result of the Sainsbury’s/Dansk joint venture.

Six new Netto stores have already opened and 10 more willfollow by the end of this year. Generally, smaller in size thanAldi and Lidl, the Netto requirement for which we are seekingsites in their target area in the north of England offers developerssome great new opportunities.

Looking ahead, we fully predict that the main UK supermarketoperators will see a return to meaningful expansion within threeyears. Opening a new food store has a long lead-in period andby the end of the decade, operators will again want an openingprogramme. It may be more modest than previously, but therewill be new development activity and that will mean seekingnew opportunities in the next few years.

So the supermarket development sector is much changed – it ismore complex than ever – but it remains one of opportunity ifyou know where to look. ■


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ONLINE ORDERS

07 FOOD AND LEISURE MARKET

More >><< Back







OF GROWTH

INVESTORSUNDETERRED


IT'S RETAILING...

AFFIRMATIVE!


SALES VOLUMES


PERFORMANCE


CONFIDENCE


15-YEAR LEASES


SINCE 2011


10 YEARS


OPPORTUNITIES


OCCUPIER MIX


IN 2017



TO £2.39BN






TO THE MIX


SINCE 2007


FOOD BRANDS




ADVICE



THIS YEAR








ROSS KIRTONDirector


Retail Agency




The revolution in the food and drink sector continues unabatedin the UK: we're eating and drinking outside of our homesmore than ever before and this is having a profound effect on shopping environments across the UK.

In recent years, eating out has emerged as a major recreational pursuit.

Satisfying our hunger for new cuisines and energised formatsproduces a continuous flow of new concepts.

With real wage growth and increased consumer spending, the amount we spend on 'going out' is increasing.

According to Barclaycard, in the first quarter of 2015, spending in restaurants was 17% up year-on-year.

This is fuelling unprecedented levels of demand, and we areseeing rents for food and drink outlets often being significantlyahead of the pure retail offers which they sit next to.

In London, restaurant rents in prime central areas have risenby as much as 50-60% in the past five years and continue to tick up.

However, this is not a phenomenon which is confined to theCapital; we're seeing substantial demand across the regions andlandlords are only too happy to accommodate these operatorswho typically seek longer leases than mainstream retail uses.

Satisfying our hunger and thirst has provided much-neededoccupier demand at a time when many retailers have beendrawing in their horns.

As a result, we are now seeing the food and drink offer inshopping centres take centre stage instead of being squashedinto the kind of uninspired lower level food courts that sprangup from the 1980s onwards.

Dining – in all its forms – increases dwell time and that worksfor both landlords and the retailers that cluster around food,drink and leisure offers.

Synergistic leisure concepts complement food and drink offersand can unlock value for shopping centre owners and, in someinstances, possibly help reinvent ailing centres. ➝


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HUNGRY, THIRSTY – AND LOOKING FOR FUN




The cinema sector

A trip to the cinema is enjoying a renaissance and that's beingreflected in new cinema openings.

50 new cinemas are forecast to open in the UK over the nexttwo years providing more than 180 screens a year; a substantialincrease on 2014 openings.

With the major film production companies releasing an eclecticmix of films ranging from The Theory of Everything throughto this year's blockbusters, Jurassic World and the newJames Bond movie, this broadened appeals looks set to gain momentum.

Of particular interest in terms of cinema which complementthe shopping experience are the smaller niche operators suchas Everyman, Curzon and The Light.

Curzon’s offer of a diverse film selection and more luxuriousseating with a licensed café/bar is typical of these operatorsand is proving attractive. ➝


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UK cinema openings 2013-2016

Sites Screens

2013

2014

2015 (Forecast)

2016 (Forecast)

12

9

27

23

53

56

182

181









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ONLINE ORDERS

Source: Colliers International/Various

Although affluent market towns and London villages remain theirpreferred locations, these operators are selectively consideringshopping centres with Everyman now open in the Mailbox inBirmingham and Curzon committing to Westgate in Oxford.

Installing cinemas into these environments can be a capital-intensive process, but ways are now being found to structure this to meet the needs of both occupiers and landlords.

For example, The Light has been able to achieve highly incentivised or turn-key style operations in return for an artificially high rent. This effectively rentalises their fit-outsand is working well for both parties at a number of locationsthroughout the UK.

The health & fitness sector

The health & fitness sector – and particularly the budget gymoffer – is flourishing.

There are now more than 220 clubs operating under thismodel in the UK – that's an astonishing growth rate of 203%during the last five years. ➝


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460,000430,000

310,000300,000

280,000200,000185,000183,000180,000

Leading UK health and fitness club operators by number of members 2014

David Lloyd LeisureVirgin Active

The Gym

Pure Gym

DW SportsFitnessNuffieldHealth

LA Fitness

Bannatyne FitnessFitness First




Source: Mintel






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30%

TO£2.39BN


GROWING

TO 25,000SQ FT




AT c.7.5%


50 NEWCINEMAS ARE


TWO YEARS



DURING 2015


TO BE EXERCISED


EXTRAORDINARY RATE









RETAIL PROPERTY



BEEN WELL RECEIVED


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ONLINE ORDERS

While the logical conclusion might be that the upturn in theeconomy could lead consumers to increase their spend andupgrade to clubs offering more facilities such as racquets and pools, the emergence of micro gyms would suggest thatconsumer habits in the gym market would appear to be mirroringsupermarket shopping where people are blending discountand upmarket offers.

In the gym sector, many users have traded down from mid-market clubs to a budget offer but also book specialityclasses in micro gyms such as 1 Rebel, Psycle and Barry'sBootcamp.

These studio-based clubs, typically comprise of 3,000-5,000sq ft and focus on instructor-led high intensity classes, and benefit from a wider retail provision with juice bars and training kit being part of the offer.

Despite being a relatively new concept to the UK, indoor trampolining and free jumping have been well received at anumber of locations. There are now several new occupiersseeking representation such as Gravity who opened at Xscapein Yorkshire and Australian group Sky Zone.

It is a concept that has proved a good replacement redundantleisure space on leisure parks or otherwise surplus space inshopping centres. Its appeal has proved to be quite broad witha high number of corporate and family-orientated bookings.Requirements range from 15,000-30,000 sq ft although, ascan be imagined, a good ceiling height is also required – usuallyaround six metres. ➝


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30%

TO£2.39BN


GROWING

TO 25,000SQ FT




AT c.7.5%


50 NEWCINEMAS ARE


TWO YEARS



DURING 2015


TO BE EXERCISED


EXTRAORDINARY RATE









RETAIL PROPERTY



BEEN WELL RECEIVED


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A MODEST 1.4%



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ONLINE ORDERS

The food & drink sector

The wave of restaurant expansion across the UK is unprecedented and cannot be fully detailed here. However, it is worth giving a selection of examples of the type of activitythat we are seeing in the sector:

• In Newcastle, intu are providing 21 new eateries as part of its overhaul of Eldon Square

• Restaurant chains old and new are all on the expansion trail

• Following a successful re-vamp, Bella Italia has plans toopen 70 new outlets in the next three years across retailparks and leisure parks as well as High Street locations

• Gourmet Burger Kitchen is to open 10 new sites by February of next year

• The up-for-sale Cote chain is on course to launch 15 newrestaurants this year and should open a dozen more in 2016

• Bill’s is actively seeking representation in affluent northerntowns and cities including its first foray into the shoppingcentre environment at the Trafford Centre

• KFC has a fresh new look and is targeting 50 drive-thrurestaurants in Greater London alone

• Premium concepts Hawksmoor and Iberica have chosenManchester for their first venture out of the capital

• The West Country-based modern café-bar concept,Loungers, remains highly acquisitive with eight out of thisyear's target of 20 outlets already open and a target of 25 for 2016

In London, luxury locations such as Mayfair are most in demand.For example, the letting of 1-4 Berkeley Square to RichardCaring's Caprice Holdings and the letting of 11 Berkeley Streetto Sushi Samba by Colliers has left a long list of underbiddersstill searching for a prime London foothold.

The prime restaurant market is moving forward at an extraordinary rate. But it is perhaps London's casual diningsector which is the most fascinating with a wide variety ofconcepts from better burgers, barbecue and smoke houses.

Unsatisfied appetites

In modern Britain, everywhere you look today there seems to be places to eat and drink. Their introduction into shoppingenvironments is boosting footfall, increasing dwell time andenhancing asset values through longer leases.

They are now an integral part of the UK shopping experienceand this will only become more pronounced in the years to come.However, installing these uses into standalone units or shoppingcentres can be an expensive process and it is crucial to makesure that the offer is aligned with the environment and thatthe operator will bring energy and profile to your property. ■


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ONLINE ORDERS

08 CENTRAL LONDON MARKET

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OF GROWTH

INVESTORSUNDETERRED


IT'S RETAILING...

AFFIRMATIVE!


SALES VOLUMES


PERFORMANCE


CONFIDENCE


15-YEAR LEASES


SINCE 2011


10 YEARS


OPPORTUNITIES


OCCUPIER MIX


IN 2017



TO £2.39BN






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SINCE 2007


FOOD BRANDS




ADVICE



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ROSS KIRTONDirector


Retail Agency




London has become the new frontier for a growing wave of international retailers and their arrival on these shores is changing the face of the capital’s shopping scene.

For example, for the first time in its 192-year history, thereare now more overseas retailers on Regent Street than thereare domestic brands with the Americans leading the way.

However, it is the expansion of London shopping away fromthe established pitches which is having the most significantimpact.

Twenty years ago if you were an overseas brand looking to enter London, the choice of where to locate was actuallyquite narrow.

There was Oxford Street, Regent Street and Covent Gardenor Bond Street and Sloane Street if you were at the luxuryend of retailing.

Today, it is completely different. Alongside the traditionalshopping areas there are two Westfield centres that book-endthe capital to the east and west while new, edgy retail areasare emerging in locations such as Shoreditch and Hoxton.

The Southbank is developing its own retail identity in places likeMore London, Bermondsey Street, and Borough Market whilethe first shops at Battersea Power Station open next year.

London is creating a range of shopping environments which isunequalled in the world. There were over 80 new retail andleisure openings in the West End in 2014, including Osprey,Victoria Beckham, Tiger, Simply Be & Jacamo, Omega, Kiehl’sand Hunter.

Last year we witnessed the sharpest fall in vacant units inCentral London since 2007, and our data shows that primerents rose on average by just under 15%. So will rents remainon the up?

As yet, there is no slowdown in occupier demand. The West Endbenefits hugely from tourism, both domestic and international,which significantly boosts retail spending. London had 18.7minternational tourist visitors in 2014, an 8% increase on 2013.In 2015, London is expected to attract around 2.7m more visitorsthan 2013.

Overall, West End retail sales were up 3.8% in 2014 and areforecast to grow by 4.2% this year. Total food & beveragesales were up 9.1% in 2014. ➝


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LONDON: NO ROOM FOR COMPLACENCY




Footfall in the West End declined slightly (-1.6%) in 2014,which is slightly weaker than the national pattern. Given thestrength of sterling, geo-political unrest in Russia/Ukraineand the Middle East, and the competitive influence of online,this is not a bad result.

The best performing locations in terms of footfall growth in2014 were Piccadilly Circus and Leicester Square (2.1%). BondStreet also saw annual footfall increase by 0.4%.

The Capital’s Luxury Quarter continues to see high demand,with a number of retailers seeking to acquire large ‘showroom’units through joining individual units or trading on multiple floors.

Zone A rents on Bond Street are now £1,500. That makes it themost expensive retail real estate in Europe – but only on a parwith the best streets in the world in places such as Hong Kong,Tokyo and New York.

Owing to the limited supply of retail space on Bond Street andgrowing luxury spend, nearby streets are now absorbing someof this demand. Mount Street, Dover Street and Conduit Street,in particular, continue to improve their retail offering.

Despite being in the heart of the West End, Conduit Street wasfor many years dominated by travel agents and airline offices.Now it is home to leading designer brands like Vivienne Westwood,Jimmy Choo and Dior. As a consequence Zone A rents haverisen by 150% from £200 to £500 in the past seven years.As the completion of Crossrail edges closer, development associated with the new Bond Street station will bring forwardmuch needed space, albeit at currently the less prime end ofthe street.

Carnaby Street and its surrounds provide one of the West End’smost animated retail and leisure pitches, with 150 shops, 70independent stores and more than 50 restaurants, cafes andbars. Rents are now £500 Zone A.

A number of retailers have opened their first UK store on theCarnaby estate, including ElevenParis, ProDirect and Descente,with Adidas Originals opening its concept store in Foubert’sPlace last year.

Regent Street continues to attract flagship stores and international brands, with prime rents close to £700 Zone A.The former Espirt store on the street has been split with HugoBoss taking one half and market rumour suggesting that KateSpade will occupy the remainder. Two 15,000 sq ft units atthe junction with New Burlington Place have been pre-let to Polo Ralph Lauren and Michael Kors. ➝


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30%

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Headline rents on Oxford Street have breached £1,000 ZoneA, with Swatch securing a first UK store for its Longines brandat 411 Oxford Street.

The eastern end of Oxford Street, where Zone As are around£600, will continue to improve, benefiting from Crossrail anda much needed upgrade to the station. Primark is extendingits 141,000 sq ft store by 40,900 sq ft and Zara has pre-let35,000 sq ft at 61-69 Oxford Street.

In addition to development around Tottenham Court Road,new developments at LSQ London, 48 Leicester Square andat The Crown Estate’s St James Market and Alaska Group’sHobhouse Court will all provide much needed retail andleisure capacity to satisfy the relentless demand.

West End retail demand is expected to continue to grow andoutstrip supply, generating upward pressure on rents. Continuedinvestment in the capital’s retail pitches and public realm willimprove the visitor experience and help to retain London’sprominent position in the global retail hierarchy.

The Olympics and the Royal Jubilee helped cement London’sglobal city status and brought record numbers of shoppers to the Capital. But there can be no room for complacency.

London needs to keep finding ways to attract shoppers bycreating the best shopping experience. The culture and heritageof London gives its shopping scene a massive advantage butit will also take infrastructure investment and co-ordination to make sure it continues its upward trajectory.

Currently, there appears to be no shortage of retailer demandbut occupational costs will rise with the forthcoming ratingrevaluation and global competition is fierce.

London can’t rest on its laurels. We need to invest in the city, promote its excellence and look beyond just theheadline rents. ■


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ONLINE ORDERS

09 RATING REVALUATION

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OF GROWTH

INVESTORSUNDETERRED


IT'S RETAILING...

AFFIRMATIVE!


SALES VOLUMES


PERFORMANCE


CONFIDENCE


15-YEAR LEASES


SINCE 2011


10 YEARS


OPPORTUNITIES


OCCUPIER MIX


IN 2017



TO £2.39BN






TO THE MIX


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FOOD BRANDS




ADVICE



THIS YEAR








ROSS KIRTONDirector


Retail Agency




April 1st of this year should have been the first day of a newRating List.

It should have been the day when new rateable values cameinto force and when many shopping pitches around the countrylet out a large sigh of relief because their rates bills – based onthe historically high levels of 2008 value – had been re-based.

However, with the rating revaluation postponed until 2017, therewill be a further wait before the business rates landscape hasa more equitable topography. Instead of being the day that anew rating regime came into effect, April 1st 2015 now becomesthe valuation date on which the 2017 revaluation will be based.

The headline story from the next revaluation is that, as a whole,the regions outside London will fare better in terms of thenew burden while the Capital’s bills will begin to reflect thephenomenal retail rental growth of recent years.

For example, based on the assumption of a 2017 UniformBusiness Rate or multiplier of 50p and ignoring the effect of a transitional relief or phasing scheme, the rates bills in theseregional locations will decrease as follows with effect from 1 April 2017. ➝


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REGIONAL SHOPS TO BENEFIT FROM REVALUATION

Newport -79%

Port Talbot -64%

Llanelli -58%

Dunstable -57%

Neath -56%

Nuneaton -54%

Paisley -54%

Haverfordwest -50%

Kidderminster -50%

Pontypridd -50%

Rugby -50%

Tamworth -50%





Potential rates bill reductions

Given that retailer demand for shops is influenced by the totaloccupation costs of rent and rates, then a decrease in the lattershould leave some potential for future rental growth. And forinvestors holding retail property assets, the good news is therecan perhaps be a reversal of seven years of rental decline.

London retail locations will face an increased burden at the2017 revaluation but the ‘broad shoulders’ of this marketbased on phenomenal retailer and shopper demand is expectedto make the impact less profound than the benefit that the regions may feel.

The following are some examples of the projected rate increases in various locations across the Capital. ➝


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Dover Street +175%

Bishopsgate +140%

Marylebone High Street +122%

Leicester Square +113%

Old Bond Street +107%

New Bond Street +100%

Strand� +83%

Jermyn Street +71%

Covent Garden +64%

Oxford Street +60%










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Potential rates bill increases

However, the situation is not quite as straightforward as winners and losers.

The issue for the Government is that by delaying the revaluationfrom 2015 until 2017 they have helped fuel the growth in rentsin the very best locations while at the same time assisting indepressing rents in the poorest. If they introduce a transitionalrelief scheme to phase in the increases then it will have to befinanced by those with large reductions which will also haveto be phased in.

The Colliers Rating Team is advising a large number of retailclients throughout the country and with the 2017 revaluationon the horizon we are speaking to the Valuation Office to makesure they fully understand how the market has been shapedover the last few years.

For many people in the Valuation Office this is their firstrevaluation so it is important that the private sector engagesfully to provide information and insights. The Government arecarrying out a further review of business rates through anHM Treasury discussion paper.

The findings are not due to be published until the budget of2016 by which time 95% of the revaluation process will havebeen completed.

Like all businesses, retailers need to plan ahead and we are nowadvising clients on budgetary estimates post-2017 particularlyon new stores as well as helping to lobby government locallyand nationally.

In the face of this, it is essential that all retailers seek ratingadvice and, similarly, landlords need to have a perspective onhow the rateable values of their properties will be effected in 2017. ■


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30%

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10 MARKET FORECASTS AND OUTLOOK

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OF GROWTH

INVESTORSUNDETERRED


IT'S RETAILING...

AFFIRMATIVE!


SALES VOLUMES


PERFORMANCE


CONFIDENCE


15-YEAR LEASES


SINCE 2011


10 YEARS


OPPORTUNITIES


OCCUPIER MIX


IN 2017



TO £2.39BN






TO THE MIX


SINCE 2007


FOOD BRANDS




ADVICE



THIS YEAR








ROSS KIRTONDirector


Retail Agency




Following four consecutive quarters of uplifts, the MSCI All-Retailrental growth measure based on the basket of properties thatIPD monitors, was flat in Q1 2015. With the exception of theNorth West and North East, all regions outside of London saw rents fall on the previous three months.

Our monitoring of what is happening in the retail leasing marketwas largely in line with this, but we expect values are set tostrengthen on the back of stronger retail sales.

Consumer purchasing power will be buoyed by a cocktail oflow inflation/deflation, rising real wages and a tighter labourmarket, providing a boost to occupier markets. Nonetheless,rental performance in 2015 will be mixed when categorisedby type of property and geography. ➝


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INVESTORS DRIVE YIELDS DOWN BUTRENTAL GROWTH REMAINS MUTED

-1%

0%

1%

2%

3%

4%

5%

Std. ShopCentral London

Mar – 14 Jun – 14 Sep – 14 Dec – 14 Mar – 15

Std. Shop(ex. CL)

RetailWarehouses

ShoppingCentres

Supermarkets

3%

4%

5%

6%

7%

8%

Mar–06

Mar–07

Mar–08

Mar–09

Mar–10

Mar–11

Mar–12

Mar–13

Mar–14

Mar–15

2%

4%

6%

8%

10%

0

5%

10%

15%

20%

25%

2014 2015 2016 2015 - 19

Annualised rental growth projection 2015-19




Source: MSCI/Colliers International

Rents edging up

Rental values are expected to rise by a modest 1.4% in 2015,a slight acceleration on last year.

Central London will continue to lead the way, with rents expected to grow by 7.7% this year, and by an average of 4.8% pa over the next four years.

Visa relaxations for Chinese visitors and a stronger US dollarare expected to provide a boost to tourist numbers. However,the weaker Euro and the relative strength of sterling againstother global currencies are set to temper tourism growth,particularly from the EU.

Meanwhile, at the other end of the spectrum, rental growthfor supermarkets will remain disappointing as it turns negative(-0.6%) this year, with the major occupiers hampered by therise of discounters, the shift in shopping patterns increasinglyfavouring convenience, and the resulting excess supply oflarge format stores.

When combined with low inflation on RPI-linked leases, supermarket rental growth in 2015-2019 is expected to be negative or closer to zero. ➝


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-1%

0%

1%

2%

3%

4%

5%



Std. Shop(ex. CL)

RetailWarehouses

ShoppingCentres

Supermarkets

3%

4%

5%

6%

7%

8%

Mar–06

Mar–07

Mar–08

Mar–09

Mar–10

Mar–11

Mar–12

Mar–13

Mar–14

Mar–15

2%

4%

6%

8%

10%

0

5%

10%

15%

20%

25%

2014 2015 2016 2015 - 19

Retail yields by sub-sector




Source: MSCI

Shopping CentreRetail Warehouse

Std Shop Rest of UKStd Shop Central London

Supermarket






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Demand sharpening yields

Despite the sluggish recovery in the occupier market, thepressure exerted by the weight of money is expected to persist,with investor demand for retail, particularly for prime andgood secondary assets, set to remain active.

The All-Retail IPD equivalent yield hardened in the first quarter of this year, and this trend is expected to continue.

We are forecasting an inward movement of 26 bps for the All-Retail yield by the end of this year, resulting in capitalgrowth of 5.3% and total returns of 10.8% for 2015.

The sharpest yield compression is likely to be in shoppingcentres (40 bps) followed by standard shops (32 bps) and retail warehouses (26 bps).

Meanwhile, against a backdrop of a challenging occupier market,supermarkets may be the only sub-sector recording a softeningof yields as they are expected to move out by 19 bps over thecourse of 2015.

Dividing standard shops by geography, the Rest of the SouthEast will see the most noticeable inward yield correction (34 bps), followed by Central London (28 bps) and the Rest of the UK (22 bps). ➝


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-1%

0%

1%

2%

3%

4%

5%



Std. Shop(ex. CL)

RetailWarehouses

ShoppingCentres

Supermarkets

3%

4%

5%

6%

7%

8%

Mar–06

Mar–07

Mar–08

Mar–09

Mar–10

Mar–11

Mar–12

Mar–13

Mar–14

Mar–15

2%

4%

6%

8%

10%

0

5%

10%

15%

20%

25%

2014 2015 2016 2015 - 19

Retail yields – standard shops by geography

City & Mid TownWest End

Rest LondonSouth East

Rest of UK




Source: MSCI






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ONLINE ORDERS

Although the much-anticipated rental recovery across thecountry has not gathered pace as quickly as hoped, there is stilla considerable yield differential outside London. This is likely tocontinue to attract those investors who have been priced outof the Capital and are looking for opportunities in strong markettowns, particularly in the South East.

At the All-Property level, capital growth of 9.5% will accountfor the majority of the 15% total return forecast for this year,with an average return of 7.9% pa in the 2015-2019 forecastperiod.

Although yield hardening is expected to peter out next year as interest rates rise, rental growth is anticipated to bolstertotal returns to some extent, as occupier markets build on the momentum gained in 2015.

While the retail sector is set to lag behind the industrial andoffice sectors in terms of annualised total returns over the nextfour years to 2019, there will still be considerable scope for aboveaverage returns in the medium term through stock selection,active asset management, and the realignment of tenant mixto reposition challenged shopping centres.

It is a market which will require experience and expertise, andwe feel there are considerable opportunities in the investment,development and leasing markets if a coherent and selectiveapproach is taken. ➝


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-1%

0%

1%

2%

3%

4%

5%



Std. Shop(ex. CL)

RetailWarehouses

ShoppingCentres

Supermarkets

3%

4%

5%

6%

7%

8%

Mar–06

Mar–07

Mar–08

Mar–09

Mar–10

Mar–11

Mar–12

Mar–13

Mar–14

Mar–15

2%

4%

6%

8%

10%

0

5%

10%

15%

20%

25%

2014 2015 2016 2015 - 19

Total return by sector

All RetailAll Office

All IndustrialAll Property




Source: MSCI/Colliers International






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ONLINE ORDERS

Online – but not always fine

In terms of occupier demand and rental progression, the overallscene will, of course, continue to be impacted by the growthof online retailing.

Interestingly though, it would seem that while online retailingis still burgeoning, the honeymoon period with consumers is now over.

A recent survey of online shoppers by JDA/Centiro reportedthat in the last 12 months, almost half of those surveyed statedthey had experienced problems with their online orders. Andmore worryingly for online retailers, 71% of those polled saidthey would be likely to switch to an alternative retailer as a result of a poor online experience.

That was 10% up on the previous year and shows the impatiencewe have with online shopping that, quite literally, fails to deliver.

John Lewis recently decided to charge for the delivery of onlineorders worth less than £30. With other retailers likely to followsuit, this could prove to be a step along the way of rebalancingthe substantial competitive advantage that online retailing has held over many physical retail outlets.

Retail’s new two-way street

Intriguingly, faced with the challenge of engendering customeraffinity many online retailers are now looking to complementtheir online offer with physical stores.

What was once thought to be an emphatically one-way streetwith retail migrating online is now turning into a two-way process.

For example, made.com – a retail offer that was initially predicated entirely on being an online entity – has opened an8,000 sq ft showroom on London’s Charing Cross Road andhas plans for more across the country.

One of the first retailers to open its doors at the eagerly anticipated Battersea Power Station redevelopment will befurniture 'etailer', Loaf, which is taking a 7,500 sq ft store and has plans for 10 more by 2018.

This more balanced integration between the physical and digitalshopping worlds, is to be welcomed. It shows how both canfeed off each other and provide complementary functions forthe consumer.

And this integration now goes beyond etailers taking physicalstores. Some online companies who do not want to go as faras opening their own stores are looking to team up with generalretailers to create a click-and-collect platform which removessome of the uncertainty – and logistical inefficiency –of home delivery. ➝


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ONLINE ORDERS

Last year, Argos and ebay extended their joint venture andenabled 65,000 online ebay retailers to use the Argos 650-store network for click-and-collect sales.

The competitive challenge that online retailing presents to thephysical shopping world should not be forgotten. But what isemerging is a more synergistic relationship where both sidesof the equation have realised what they can offer the other.

We believe this opens up whole new horizons for the physicalshopping world – and offers as many possibilities as it does threats.

Development is back

Looking ahead, perhaps the most exciting new aspect of theretail property sector is the raft of new development that iscoming forward.

Whether it is new shopping centres, remodelled High Streets,revamped retail parks or the reconsidering of sites previouslyearmarked for foodstore schemes, new development representsthe renewal of our sector and an opportunity to bring a freshbalance and dynamism to the shopping experience.

In an environment of fierce competition there is little marginfor error, but there is great confidence that the sector canbring forward the next generation of retail property.

A new frontier

The UK is creating a new shopping environment that relatesas much to the digital world as it does to the see-it/touch-itexperience of physical retailing.

We are facing a remarkable period of change and there is stillmuch to be done in addressing the historic legacy of the sector.

However, the opportunities are clear and undeniable. ■


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AND EXPERTISE




30%

TO£2.39BN


GROWING

TO 25,000SQ FT




AT c.7.5%


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ONLINE ORDERS

11 CONTACTS

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Markets

Mark PhillipsonDirector – Central London Retail InvestmentHead of UK Retail Group+44 20 7344 [email protected]

James WatsonHead of Retail Investment+44 20 7344 [email protected]

James FindlaterHead of Shopping Centre Investment+44 20 7344 [email protected]

Greg StylesHead of Retail Development+44 113 200 [email protected]

Paul SouberHead of Central London Retail Agency+44 20 7344 [email protected]

Dan SimmsHead of Retail Agency – South+44 20 7344 [email protected]

Rupert LongHead of Shopping Centre Leasing+44 20 7344 [email protected]

Laurence EdwardsDirectorRetail Agency – Out of Town+44 20 7487 [email protected]

Ross KirtonDirectorLicensed & Leisure+44 20 7487 [email protected]

Rating

John WebberHead of Rating+44 121 265 [email protected]

Research

Mark CharltonHead of Research and Forecasting+44 20 7487 [email protected]

Walter BoettcherDirectorResearch and Forecasting+44 20 7344 [email protected]


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This report gives information based primarily on Colliers International data, which may be helpful in anticipating trends in the property sector. However, no warranty is given as tothe accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or conclusions contained in this report and they must not be relied on for investment or any other purposes. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property. July 2015 ©

Colliers International is the licensed trading name of Colliers International Property Advisers UK LLP (a limited liability partnership registered in England and Wales with registerednumber OC385143) and its subsidiary companies, the full list of which can be found on www.colliers.com/ukdisclaimer Our registered office is at 50 George Street, London W1U 7GA.




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