FIT TEST SURVIVAL - Colliers International

 
FIT TEST SURVIVAL - Colliers International
SURVIVAL
                                                         OF THE
            FITTEST                                      Midsummer Retail Report 2017

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                          A NEW BREED
                                                          OF INVESTMENTS?
                                                                            MAPPING THE DNA
                                                                            OF RETAIL SUCCESS
                                                                                                THE ADAPTABLE
                                                                                                CAPITAL
                                                                                                                STILL HUNGRY
                                                                                                                LIKE A WOLF?
                                                                                                                               THE RATING
                                                                                                                               JUNGLE
                                                                                                                                            REGIONAL MARKET
                                                                                                                                            UPDATES
                                                                                                                                                              CONTACTS
                                                                                                                                                                         <   >
FIT TEST SURVIVAL - Colliers International
“
            It is not the strongest of the
            species that survives, nor the
            most intelligent, but the one
            most responsive to change
            Charles Darwin

EXECUTIVE
SUMMARY
            ”
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                               STILL HUNGRY
                                                                                                               LIKE A WOLF?
                                                                                                                              THE RATING
                                                                                                                              JUNGLE
                                                                                                                                           REGIONAL MARKET
                                                                                                                                           UPDATES
                                                                                                                                                             CONTACTS
                                                                                                                                                                        <   >
FIT TEST SURVIVAL - Colliers International
EXECUTIVE SUMMARY

                                             2017 Midsummer
                                             Report Key Points
“
Upward spikes in
‘persistent vacancy’
                                             UK Retail Property Performance
                                             ■ UK prime retail rents are up 1.8% year-on-year – the best

                                               increase since 2008 while prime shop vacancy is down 0.2%
                                               – the first nationwide downward movement since 2014.
                                                                                                                            ■   The proportion of ‘persistent vacancy’ – shops that have been
                                                                                                                                vacant for more than a year – has risen from 6.1% to 6.6% while
                                                                                                                                the proportion which has yet to find a tenant after more than two
                                                                                                                                years has risen from 3.0% to 3.6%.

illustrate a deepening                       ■   In terms of rental performance, Scotland was the most notable              ■   These upward spikes in ‘persistent vacancy’ are the first for two
                                                 and strongest region in the year to the end of April 2017 with                 years and illustrate a deepening polarisation in the market.
polarisation in                                  an average increase of 4.5% while Central London turned in 3%
the market                                       growth. This was healthy but nothing like the Capital’s double-digit       ■   The demonstrable cooling of demand in the F&B sector is clearly

”
                                                 performance of recent years.                                                   concerning especially as it has been such a driver of occupier demand
                                                                                                                                in the past 2-4 years. However, with some of the ‘vanguard concepts’
                                             ■   The proportion of the 420+ locations monitored for the report                  now taking a standback on further expansion, this is presenting
                                                 which saw rents fall in the research period more than doubled                  other operators to increase their market coverage – and on more
                                                 from 5% to 12%. This has abruptly reversed an improving trend                  advantageous terms than previously prevailed.
                                                 which, prior to the latest figures, dated back to 2012 when 35%
                                                 of locations had experienced rental drops during the previous year.        The Investment Market
                                                                                                                            ■ The investment market – despite a chronic undersupply of stock

                                             ■   The sector is also facing substantial challenges in the form of              – still has many active buyers but there are question marks next
                                                 ‘persistent vacancy’ and lower occupier demand – the latter being            to the medium-term availability of debt and the ongoing ability
                                                 exacerbated by reduced consumer spending and increased property              to refinance existing debt positions.
                                                 occupation costs.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                              A NEW BREED
                                                              OF INVESTMENTS?
                                                                                MAPPING THE DNA
                                                                                OF RETAIL SUCCESS
                                                                                                    THE ADAPTABLE
                                                                                                    CAPITAL
                                                                                                                    STILL HUNGRY
                                                                                                                    LIKE A WOLF?
                                                                                                                                       THE RATING
                                                                                                                                       JUNGLE
                                                                                                                                                        REGIONAL MARKET
                                                                                                                                                        UPDATES
                                                                                                                                                                          CONTACTS
                                                                                                                                                                                           <       >
FIT TEST SURVIVAL - Colliers International
EXECUTIVE SUMMARY

“
The foodstore sector
is set to be one of the
                                             ■

                                             ■
                                                 Where shopping centre owners and their valuers have been honest
                                                 with themselves, values have undoubtedly fallen, but there are no signs
                                                 – yet – of the financial distress that precipitates sales.

                                                 The logistics facilities that serve online shopping fulfilment
                                                                                                                            London
                                                                                                                            ■ The London market has cooled. We predict that average prime

                                                                                                                            ■
                                                                                                                              rents across the capital will be flat during the next 12 months.

                                                                                                                                The market is adapting to the increased occupational costs driven
best performers in                               are emerging as a new breed of retail assets.                                  by higher rates bills and also has to absorb the space flowing
                                                                                                                                into the market from more than 2m sq ft of new shopping
respect of investment                        ■   Logistics have been the strongest performer across the property                developments.
volumes                                          sector (8.2% return in the past 12 months) and now change

”
                                                 hands at lower yields than all but the best trophy retail assets.          ■   Shopping pitches across the capital are being reshaped by the
                                                                                                                                new market conditions.
                                             ■   With traditional food retailers starting to improve their trading
                                                 performance, the foodstore sector is set to be one of the best             ■   Nowhere in the capital is immune to the new market forces as
                                                 performers in respect of investment volumes as investors seek                  illustrated by Bond Street where an estimated 30+ leases are
                                                 income preservation rather than income growth.                                 being quietly marketed.

                                             ■   Prime High Street investments have been selling at yields of 3.5-4%        ■   Tottenham Court Road is emerging as a new dynamic shopping
                                                 – defying the gloom about the subsector as a whole. However,                   pitch – driven by new development a host of new office HQs
                                                 investors need to ‘stick to the best pitches in the best towns                 coming to the immediate area.
                                                 where trading conditions continue to remain healthy’.
                                                                                                                            ■   Prime rents on Tottenham Court Road rose by 7.5% in the year
                                             ■   An increased supply of stock from forced sales in the secondary                to the end of April – more than double the Central London average.
                                                 markets may not be that far away. This is not great news for those
                                                 who are sitting on assets where the debt-value is equation is heading
                                                 in the wrong direction, but a tasty prospect for predators who are
                                                 sitting on a mountain of cash.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                              A NEW BREED
                                                              OF INVESTMENTS?
                                                                                MAPPING THE DNA
                                                                                OF RETAIL SUCCESS
                                                                                                    THE ADAPTABLE
                                                                                                    CAPITAL
                                                                                                                    STILL HUNGRY
                                                                                                                    LIKE A WOLF?
                                                                                                                                      THE RATING
                                                                                                                                      JUNGLE
                                                                                                                                                       REGIONAL MARKET
                                                                                                                                                       UPDATES
                                                                                                                                                                         CONTACTS
                                                                                                                                                                                          <         >
FIT TEST SURVIVAL - Colliers International
EXECUTIVE SUMMARY

“
‘Driverless cars’ will
transform how retail
                                             Why open a shop today?
                                             ■ The key to entering into the shop leasing process with

                                             ■
                                               confidence lies with an analysis of profitability.

                                                 Retailer Profitability Modelling gives insights to both landlords
                                                                                                                             ■   Online retailing continues to impact the physical shopping world
                                                                                                                                 but it needs to be remembered that more than 80% of all retail
                                                                                                                                 spend still happens in a High Street shop, shopping centre, retail
                                                                                                                                 park or other ‘real life’ shopping environment.

and leisure works                                and retailers as to which brands will work best in a shop.                  ■   Deals are taking an unnecessarily long time to do and this is often
                                                                                                                                 due to an inadequately resourced decision-making process.
– especially in                              ■   The profitability picture will only be complete when there                      Everyone involved in the retail property sector needs to commit
town centres                                     is a firmer grasp of what part physical stores play in driving                  to resourcing – and ‘resist the temptation to endlessly tinker with

”
                                                 online sales.                                                                   deal terms’.

                                             ■   The next step up from retailer profitability analysis is combining          ■   We expect the upward trend in the volume of ‘persistently vacant’
                                                 it with behavioural research across shopping environments.                      shops to continue, with the only remedies being change of use
                                                                                                                                 or demolition.
                                             ■   Colliers is trialling a system that installs sensors across a shopping
                                                 area which respond to mobile phones in the vicinity, and provide            ■   During the next decade, the advent of ‘driverless cars’ will
                                                 a deeper understanding of shopper behaviour by delivering key                   transform how retail and leisure works – especially in town centres.
                                                 metrics such as footfall, visit frequency and dwell time.
                                                                                                                             ■   With Tesla, Google and Uber racing to capture this burgeoning
                                             Outlook                                                                             market, the first UK trials of driverless cars are scheduled f
                                             ■ Given that rents have re-based across the UK and retailers have                   or 2019.
                                               now entered a new phase of store consolidation, nothing is going
                                               to ‘bring back to life’ shops that have been empty for two                    ■   This evolutionary leap forward in transport can be an opportunity
                                               or more years.                                                                    to transform our environment and breathe life back into town centres.

                                             ■   We are now seeing ‘a real sense of purpose in the integration
                                                 between online and physical retailing’.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                              A NEW BREED
                                                              OF INVESTMENTS?
                                                                                MAPPING THE DNA
                                                                                OF RETAIL SUCCESS
                                                                                                    THE ADAPTABLE
                                                                                                    CAPITAL
                                                                                                                     STILL HUNGRY
                                                                                                                     LIKE A WOLF?
                                                                                                                                       THE RATING
                                                                                                                                       JUNGLE
                                                                                                                                                        REGIONAL MARKET
                                                                                                                                                        UPDATES
                                                                                                                                                                          CONTACTS
                                                                                                                                                                                            <       >
FIT TEST SURVIVAL - Colliers International
Introduction

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                               STILL HUNGRY
                                                                                                               LIKE A WOLF?
                                                                                                                              THE RATING
                                                                                                                              JUNGLE
                                                                                                                                           REGIONAL MARKET
                                                                                                                                           UPDATES
                                                                                                                                                             CONTACTS
                                                                                                                                                                        <   >
FIT TEST SURVIVAL - Colliers International
INTRODUCTION

                                              Adapting to change
                                              The Midsummer Retail Report always seeks to ‘take the temperature of the UK retail property
                                              sector and look beyond simple statistics.
                                              Indeed, the headline figures from the UK retail property sector are,        We appear to be going through another stepchange in the sector and
                                              on the face of it, positive with prime rents up 1.8% year-on-year           that has ramifications for all of us involved in developing, leasing and
                                              – the best increase since 2008 – while overall prime vacancy has            investing in retail property. There is no ‘silver bullet’ in this situation
                                              decreased by 0.2% – the first nationwide downward movement                  but an ever-more precise approach is clearly the order of the day.
                                              since 2014.
                                                                                                                          The investment market – despite a chronic undersupply of stock
                                              But clearly there are other figures which cause more concern                – still has many active buyers but there are question marks next
                                              that lie behind these statistics.                                           to the medium-term availability of debt and the ongoing ability
                                                                                                                          to refinance existing debt positions. It’s a great time to be
                                              The level and persistency of long-term vacancy can only lead you            a cash buyer.
                                              to conclude that are a growing volume of shops that will never
  Mark Phillipson                             come back into retail use.                                                  The cooling of demand in the F&B sector is clearly concerning
                                                                                                                          especially as it has been such a driver of occupier demand in the
     Head of UK Retail                        Given that rents have re-based across the UK and retailers have now         past 2-4 years. Eating and drinking out in all its forms – even for
                                              entered a new phase of store consolidation, nothing is going to bring       Millennials – is the kind of discretionary spending that may be
                                              back to life shops that have been empty for two or more years.              vulnerable to a cocktail of inflation and eroded wage growth.

EXECUTIVE
SUMMARY
             INTRODUCTION
                            THE EVOLUTION
                            OF RETAIL
                                            THE MARKET:
                                            VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                   THE RATING
                                                                                                                                   JUNGLE
                                                                                                                                                     REGIONAL MARKET
                                                                                                                                                     UPDATES
                                                                                                                                                                       CONTACTS
                                                                                                                                                                                           <       >
FIT TEST SURVIVAL - Colliers International
INTRODUCTION

“
We are now seeing a
real sense of purpose
                                             But the retail property sector is, as I hope this reports demonstrates,
                                             evolving not dying.

                                             We are now seeing a real sense of purpose in the integration of
                                             online and physical retailing and we should all remember when we’re
                                                                                                                          In his book, The Road Ahead, Bill Gates says: “We always overestimate
                                                                                                                          the change that will occur in the next two years and underestimate
                                                                                                                          the change that will occur in the next 10”.

                                                                                                                          In the face of this, he advises: “Don’t let yourself be lulled into inaction”
in the integration of                        in our ‘glass-half-empty’ moments, that more than 80% of all retail
                                             spend still happens in a High Street shop, shopping centre, retail park      This is good advice for all of us in the retail property sector.
online and physical                          or other ‘real life’ shopping environments.
retailing                                                                                                                 I hope you find our latest report useful and thought-provoking.

”
                                             We have to engage with all the factors influencing our sector
                                             and that will take judgment and decisiveness.                                All of us in the Colliers UK Retail team would be pleased to discuss
                                                                                                                          any of the points which it raises.
                                             Our theme in this report is the impact of change and how survival
                                             – whether it be in nature or business – requires the ability to adapt.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                   THE RATING
                                                                                                                                   JUNGLE
                                                                                                                                                      REGIONAL MARKET
                                                                                                                                                      UPDATES
                                                                                                                                                                        CONTACTS
                                                                                                                                                                                             <       >
FIT TEST SURVIVAL - Colliers International
The Evolution
                                                                                                      of Retail
                                                                                                      PRESS PLAY TO WATCH THE FILM

                                                                                                        Mark Charlton and Mark Phillipson look at the
                                                                                                        Evolution of Retail during the past 30 years and
                                                                                                        suggest why ‘driverless cars’ may drive town
                                                                                                        centre transformation.

                                                                                                               DOWNLOAD TRANSCRIPT

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                                STILL HUNGRY
                                                                                                                LIKE A WOLF?
                                                                                                                                THE RATING
                                                                                                                                JUNGLE
                                                                                                                                               REGIONAL MARKET
                                                                                                                                               UPDATES
                                                                                                                                                                 CONTACTS
                                                                                                                                                                            <   >
FIT TEST SURVIVAL - Colliers International
The Market:
                                                                                                      Vital Signs

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                               STILL HUNGRY
                                                                                                               LIKE A WOLF?
                                                                                                                              THE RATING
                                                                                                                              JUNGLE
                                                                                                                                           REGIONAL MARKET
                                                                                                                                           UPDATES
                                                                                                                                                             CONTACTS
                                                                                                                                                                        <   >
THE MARKET: VITAL SIGNS

                                              Rent and vacancy improvement
                                              but market polarises
                                              Dan Simms reports on the progress of rents, vacancy levels and leasing across the UK retail
                                              property, and also looks at some of the factors influencing the market as a whole.
                                              The ‘vital signs’ of any property sector are varied but in the first
                                              instance you tend to look at rents, voids and leasing patterns to            NATIONAL                      APR 2016               APR 2017
                                              gauge the health of a market.                                                Vacancy rate
                                                                                                                                                            9.7%                  9.5%
                                                                                                                           (floorspace)
                                              Colliers carries out bespoke research analysis into these key metrics
                                              of the UK retail property sector and I’m going to review those findings
                                              and also look at what the prognosis is going forward.                       These overall figures would, of course, have been better if it had
                                                                                                                          not been for the BHS and other retailer failures such as Austin
                                              After 2-3 years of relative stability in the occupier market, it was        Reed and Jones, which have returned a significant amount of
                                              hoped that we can look to move forward with some purpose but                space to the market.
                                              clearly – as last year demonstrated – further challenges lie ahead.
  Dan Simms                                                                                                               The ‘BHS effect’ is most marked in the analysis of prime space
                                              Vacancy Levels                                                              vacancy which shows that it has moved up from 4.1% to 5.4%.
     Head of Retail Agency – South            There is some positive news from the vacancy profile across the
                                              UK but that is tempered by the long-term level of persistent vacancy.

                                              We monitor voids across a sample of key UK locations and in the year
                                              to the end of April, the overall void rate of this sample moved down
                                              from 9.7% to 9.5% – encouragingly, this is the first annual reduction
                                              since 2014.

EXECUTIVE
SUMMARY
             INTRODUCTION
                            THE EVOLUTION
                            OF RETAIL
                                            THE MARKET:
                                            VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                  THE RATING
                                                                                                                                  JUNGLE
                                                                                                                                                   REGIONAL MARKET
                                                                                                                                                   UPDATES
                                                                                                                                                                     CONTACTS
                                                                                                                                                                                      <        >
THE MARKET: VITAL SIGNS

“
A core of stubbornly
vacant space remains
                                             PRIME

                                             Vacancy rate
                                             (floorspace)
                                                                              APR 2016

                                                                                 4.1%
                                                                                                       APR 2017

                                                                                                          5.4%
                                                                                                                          Rents
                                                                                                                          Turning to rents, Colliers monitors average prime Zone As in 420+
                                                                                                                          UK locations.

                                                                                                                          Our latest analysis shows that 18% of the locations recorded rental
and is growing                                                                                                            increases, 70% remained stable while 12% declined in the year

”
                                             So somewhat counter-intuitively, in the year to the end of April,            to May 2017.
                                             secondary retail space recorded a better vacancy performance
                                             by trending down from 14.1% to 12.8%                                         Across the country as a whole, average prime rents are up 1.8%,
                                                                                                                          and this falls to 1.1% if you exclude London. This was the best per-
                                                                                                                          formance outside London since 2008.
                                             SECONDARY                        APR 2016                 APR 2017
                                                                                                                          Scotland was the most notable and strongest region this year with
                                             Vacancy rate
                                                                                 14.1%                   12.8%            an average increase of 4.5% while Central London has turned in 3%
                                             (floorspace)
                                                                                                                          growth which is still healthy for the Capital but nothing like the
                                                                                                                          double-digit performance of recent years.
                                             However, the caveat sitting behind these stats is that a core of
                                             stubbornly vacant space remains and is growing as an increasing              Given that the Retail Price Index increased by around 3% in the
                                             amount of shopping space becomes effectively redundant.                      same period, UK rental growth is however technically negative.

                                             The proportion of retail units in our sample that have been vacant           I would suggest there is one key takeaway from the latest figures
                                             for more than a year has risen from 6.1% to 6.6% while the proportion        which needs to be focused on.
                                             which has yet to find a tenant after more than two years has risen
                                             from 3.0% to 3.6%.                                                           While it was good to see an increase in the proportion of locations
                                                                                                                          where rents increased, the number of locations that saw rents fall
                                             We expect this trend to continue, and for this particular limb of the        more than doubled from 5% to 12%.
                                             retail property body in many cases the only answer would seem
                                             to be amputation through change of use or demolition.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                  THE RATING
                                                                                                                                  JUNGLE
                                                                                                                                                   REGIONAL MARKET
                                                                                                                                                   UPDATES
                                                                                                                                                                     CONTACTS
                                                                                                                                                                                      <       >
THE MARKET: VITAL SIGNS

“
A lot of retail space
is failing to adapt and
                                             This has abruptly reversed an improving trend which, prior to the
                                             latest figures, dated back to 2012 when 35% of locations had
                                             experienced rental drops in the previous year.

                                             The latest jump to 12% echoes the accelerating amount of the
                                                                                                                          To put all that in context of our theme today: there are a number
                                                                                                                          of regions and locations with a positive occupier story and a record
                                                                                                                          of recent rental growth but a lot of retail space is failing to adapt
                                                                                                                          and it will surely die. And it needs to be remembered that this sample
                                                                                                                          is only looking at prime rents so the picture across the wider retail
it will surely die                           stubbornly vacant property and suggests we are seeing another                spectrum will be even more pronounced.

”
                                             stepchange in the market.
                                                                                                                          Lease Patterns
                                             You can attribute this to the extraordinary events of last year, the rise    We also analyse the structure of leases that are being agreed for
                                             of online shopping, numerous cost pressures on occupiers, an uncertain       retail space and look at lease lengths, the propensity of break options
                                             political and economic environment or a mix of all of these, but the         and also the incentives being granted to occupiers.
                                             over-arching point is that – whether it’s in the domain of vacancy
                                             or rents – we are seeing a polarisation in the market.                       For the past four years, the average length of new leases has plateaued
                                                                                                                          at almost exactly 10 years and the propensity for occupiers to secure
                                             This polarisation is illustrated by how rents have progressed since          break options is also similarly constant and they feature in around
                                             the financial crash and how uneven the recovery has been. Since the          55% of all new leases. The model of a 10-year lease with a 5th year
                                             previous market peak in2008, Central London rents are up 64% and             break is very well established however over the last 12 months we
                                             Outer London rents up 11%. In all other UK regions rents are,                have started to see more retailers, particularly in lease renewal
                                             on average, 23% below their pre-crash high.                                  negotiations, hold out for 5 year leases with 3rd year breaks. It is
                                                                                                                          perhaps ironic that in the year when Brexit process started, our
                                                                                                                          leasing model has never looked more European.

                                                                                                                          However, there has been some movement in incentives. We’ve seen
                                                                                                                          a small increase in average London lease incentives for the 2nd
                                                                                                                          consecutive year, from 4.2 months to 5.2 months. In contrast,
                                                                                                                          incentives in both the South and North have once again reduced
                                                                                                                          slightly – this was the fifth consecutive year of steady reductions
                                                                                                                          for the north.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                  THE RATING
                                                                                                                                  JUNGLE
                                                                                                                                                    REGIONAL MARKET
                                                                                                                                                    UPDATES
                                                                                                                                                                      CONTACTS
                                                                                                                                                                                        <       >
THE MARKET: VITAL SIGNS

“
There are opportunities
for the new leaders of
                                             BHS and Beyond
                                             As it is now 15 months since over 160 large BHS stores were dropped
                                             into the market to seek new occupiers, it is probably a good time to
                                             reflect on what has happened to all this space. Predictably the take
                                             up of this space has been as hugely varied as the quality of the
                                                                                                                         reflect what has happened in the market, particularly where large
                                                                                                                         rent reductions have not been matched by large enough reductions
                                                                                                                         in the new rating assessments.

                                                                                                                         This is of course exacerbated by extreme downward phasing limitations
the occupational market                      portfolio – encouragingly, inside the M25, 11 of the 13 stores have
                                             either been let or deals are close to resolution. Elsewhere in the UK
                                                                                                                         and how this ‘locks in’ the wrong levels for years – we are working
                                                                                                                         on many properties where the phasing limits will ensure that the
to take on space                             market the success rate is far poorer and we estimate just over 1/3         correct assessment won’t be reached for 8/9 years, so in effect

”
                                             of the portfolio overall has found a new use so far.                        will never be paid at the right level.

                                             However, the positive we take from this process is that it has provided     This situation has been greatly impacted of the lack of resource within
                                             opportunities for the new leaders of the occupational market to take        the Valuation Office Agency leading to little co-ordination across
                                             on space – occupiers such as Inditex, Primark, Next, Aldi, Lidl, Sports     the country.
                                             Direct, TK Maxx, Poundworld, Morleys, Wilko, The Range, Decathlon
                                             and the new Days department store format for example have all               The High Street and shopping centre markets desperately need
                                             acquired new stores. This roll call is a list of some of the most           a boost to continue to fill their vacant units and, with the allocation
                                             successful and dynamic occupiers in our market and we should                of discretionary relief being so infrequent, phasing so limited and
                                             celebrate their continued investment in physical store space.               liabilities being excessive with little chance of a successful appeal
                                                                                                                         in the near future, the rating system is not going to help in any way.
                                             Rating Inconsistency
                                             Against this backdrop, we are also seeing the sector come to terms
                                             with the Rating revaluation.

                                             There are huge inconsistencies in the Rating valuations around the
                                             country with some areas being true to values within the market and
                                             some showing huge discrepancies. Many assessments simply do not

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                           A NEW BREED
                                                           OF INVESTMENTS?
                                                                             MAPPING THE DNA
                                                                             OF RETAIL SUCCESS
                                                                                                 THE ADAPTABLE
                                                                                                 CAPITAL
                                                                                                                 STILL HUNGRY
                                                                                                                 LIKE A WOLF?
                                                                                                                                 THE RATING
                                                                                                                                 JUNGLE
                                                                                                                                                   REGIONAL MARKET
                                                                                                                                                   UPDATES
                                                                                                                                                                     CONTACTS
                                                                                                                                                                                       <       >
THE MARKET: VITAL SIGNS

“
We need to be working
in a streamlined way
                                             ‘People Problems’
                                             The ‘lack of bodies’ at the beleaguered Valuation Office is a scenario
                                             repeated in other areas of our sector and is contributing to the
                                             grindingly slow pace of deals that we are all experiencing.
                                                                                                                          We believe this ‘human resources’ problem is a real challenge
                                                                                                                          to our sector.

                                                                                                                          Now, more than ever, we need to be working in a streamlined way
                                                                                                                          to ensure that property connects efficiently with occupiers.
to ensure that property                      Many UK property owners, most notably Funds that have merged
                                             or taken on new asset mandates and simultaneously rationalised               So what can we all do to help this situation? A commitment from all
connects efficiently                         staff numbers, are operating with overstretched asset management             of us to resource teams and decision making processes adequately,
with occupiers                               team. Lawyers who are confronted with continued fee cutting are              to resist the temptation to endlessly tinker with deal terms and to

”
                                             putting more junior staff onto transactional work and this is conspiring     avoid reappraising and approving transactions multiple times would
                                             to slow the deal process – even where all parties are in agreement.          certainly help our part of the market to have a positive impact on
                                                                                                                          the ‘Vital Signs’ of the UK’s retail property sector.
                                             When you mix this with the marked reluctance of many owners and
                                             occupiers to take decisions on deals and then stick consistently to
                                             them, you have the perfect recipe for the agonisingly slow resolu-
                                             tion of deals we see so commonly at the moment.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                  THE RATING
                                                                                                                                  JUNGLE
                                                                                                                                                  REGIONAL MARKET
                                                                                                                                                  UPDATES
                                                                                                                                                                    CONTACTS
                                                                                                                                                                                    <      >
A New Breed
                                                                                                      of Investments?
                                                                                                      PRESS PLAY TO WATCH THE FILM

                                                                                                        James Watson reviews the Investment market and
                                                                                                        talks about an asset type which is fast becoming
                                                                                                        a proxy for traditional retail property.

                                                                                                               DOWNLOAD TRANSCRIPT

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                                STILL HUNGRY
                                                                                                                LIKE A WOLF?
                                                                                                                                THE RATING
                                                                                                                                JUNGLE
                                                                                                                                             REGIONAL MARKET
                                                                                                                                             UPDATES
                                                                                                                                                               CONTACTS
                                                                                                                                                                          <   >
Mapping the
                                                                           DNA of Retail
                                                                           Success

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                               STILL HUNGRY
                                                                                                               LIKE A WOLF?
                                                                                                                              THE RATING
                                                                                                                              JUNGLE
                                                                                                                                           REGIONAL MARKET
                                                                                                                                           UPDATES
                                                                                                                                                             CONTACTS
                                                                                                                                                                        <   >
MAPPING THE DNA OF RETAIL SUCCESS

                                              Why open
                                              a shop today?
                                              In today’s turbulent world of rising business rates, internet competition, increasing wage bills and
                                              reduced consumer confidence, Matthew Thompson looks at how landlords and retailers can use
                                              profitability modelling to shape strategy.
                                              Around 15% of UK retailing make now take place online but, if my             Let’s say we’re letting a standard shop that could appeal to a variety
                                              maths are correct, that still leaves around 85% which is transacted          of retailers.
                                              in High Streets, shopping centres and retail parks throughout
                                              the country.                                                                 We get interest from a clothing brand, a footwear chain and
                                                                                                                           a cosmetics concept. Each is established and seems credible;
                                              The key to entering into the shop leasing process with confidence            their covenant strengths are not significantly different.
                                              lies with an analysis of profitability. For both occupiers and landlords,
                                              a thorough understanding of profitability is the key. The days of gut        However, the missing piece of the jigsaw is how they are likely
                                              instinct are dead.                                                           to trade in that specific unit.
  Matthew Thompson                            We have a leading Retailer Profitability Model (RPM), which is used          The following is a very de-personalised example of how we use
     Head of Retail Strategy                  by major landlord and retail clients and provides insights into the          the RPM to evaluate exactly these types of scenarios for clients.
                                              operational and property costs which retailers face.

EXECUTIVE
SUMMARY
             INTRODUCTION
                            THE EVOLUTION
                            OF RETAIL
                                            THE MARKET:
                                            VITAL SIGNS
                                                             A NEW BREED
                                                             OF INVESTMENTS?
                                                                               MAPPING THE DNA
                                                                               OF RETAIL SUCCESS
                                                                                                   THE ADAPTABLE
                                                                                                   CAPITAL
                                                                                                                   STILL HUNGRY
                                                                                                                   LIKE A WOLF?
                                                                                                                                   THE RATING
                                                                                                                                   JUNGLE
                                                                                                                                                    REGIONAL MARKET
                                                                                                                                                    UPDATES
                                                                                                                                                                      CONTACTS
                                                                                                                                                                                         <      >
MAPPING THE DNA OF RETAIL SUCCESS

  This – very simplified – example profiles three different occupiers
  for the same shop. Through splitting out all key ‘moving parts’, we can       RETAILER TYPE                                             CLOTHING          FOOTWEAR                   COSMETICS
  understand the impact that cost changes can have on store viability,
  across different retail sectors. The tool is used to evaluate prospective     SALES
  tenants – establishing a realistic sales level for an occupier,
  benchmarked against similar retailers.                                        Sales (Ex VAT)                                            £960,000           £900,000                  £1,200,000

  This type of analysis immediately provides various perspectives.              Gross Profit                                              £720,000           £585,000                   £960,000
  For instance – should the property costs of the shop increase by
  15%, the profitability of our clothing operator would fall below 10%          PROPERTY COSTS
  of annual sales.
                                                                                Rent                                                      £275,000           £275,000                   £275,000
  To successfully absorb the change in occupational costs and to
  maintain a profit equal to 15% of annual sales, our clothing operator         Rates, Service Charge, Insurance                          £100,000           £100,000                   £100,000
  must drive a further £80,000 of sales through the till each year –
  equivalent to over £6,500 per month or an 8% improvement in its               OPERATIONAL COSTS
  sales density.
                                                                                Staff Salaries                                            £160,000           £175,000                   £215,000
  Or, what if the cosmetics brand must achieve a net profit of over
  £350,000, in order for it to be a viable store for their business and         Utilities and Other Costs                                 £45,000             £42,000                   £50,000
  to continue trading on the street?
                                                                                SITE CONTRIBUTION
  This would mean the brand would need to cut £40,000 out of its
  cost-base. This is equivalent to a rent reduction of 15%, improving           Net Profit (£)                                            £140,000            -£7,000                  £320,000
  gross margin by 4% or removing two low paid members of staff
  out of its wage bill.                                                         Net Profit (%)                                              15%                 -1%                       27%

EXECUTIVE
SUMMARY
                 INTRODUCTION
                                  THE EVOLUTION
                                  OF RETAIL
                                                    THE MARKET:
                                                    VITAL SIGNS
                                                                     A NEW BREED
                                                                     OF INVESTMENTS?
                                                                                       MAPPING THE DNA
                                                                                       OF RETAIL SUCCESS
                                                                                                           THE ADAPTABLE
                                                                                                           CAPITAL
                                                                                                                           STILL HUNGRY
                                                                                                                           LIKE A WOLF?
                                                                                                                                             THE RATING
                                                                                                                                             JUNGLE
                                                                                                                                                          REGIONAL MARKET
                                                                                                                                                          UPDATES
                                                                                                                                                                            CONTACTS
                                                                                                                                                                                                <   >
MAPPING THE DNA OF RETAIL SUCCESS

“
A deep understanding
of both occupancy and
                                             Our profile of the footwear operator also demonstrates that its
                                             business model places it at a disadvantage to other occupier types.
                                             Trading from the lowest margin, the brand would have to trade well
                                             above the footwear average sales density for the area to turn a profit.
                                                                                                                           And there is a demonstrable ‘halo effect’ for retailers when they
                                                                                                                           open stores in locations where their online sales are already strong.
                                                                                                                           Instead of simply detracting from the spend that would normally
                                                                                                                           be done online, the presence of the physical store tends increase
                                                                                                                           the total spend in that location across online and in-store.
operational costs allows                     Based on their business model – our assumed sales density would
                                             need to be over 50% higher to generate the same net profit as the             So what you’re not seeing in the figures above is how much a physical
estates to stress test                       cosmetics brand, from the same store.                                         store contributes to online sales and for many retailers that will be
their holdings in a                                                                                                        the crucial bridge between profit and loss in-store.
                                             This example is looking at the letting of just a single store in isolation.
unique way                                   However, this type of modelling becomes very powerful when applied            For brands, our Retailer Profitability Model complements any

”
                                             to an estate or adjoining units.                                              location-based network strategy – providing a platform to review
                                                                                                                           prospective sites in terms of their profitability potential.
                                             A deep understanding of both occupancy and operational costs allows
                                             estates to stress test their holdings in a unique way and see how             The next step up from this analysis is combining it with behavioural
                                             a desired tenant mix is likely to impact the financial resilience             research across shopping environments.
                                             of a group of properties.
                                                                                                                           There is a huge amount of data work taking place in this area
                                             Of course, the glaring omission in the simple example is the                  and innovations are arriving on an almost monthly basis.
                                             relationship between a brand’s online and physical trading environments.
                                             Ascribing a purchase to a particular channel is no longer relevant            One consultancy has created a system which films the shoes
                                             – offline and online retail have a symbiotic relationship.                    of people in a shopping environment, analyses the price point/
                                                                                                                           quality of their footwear and makes demographic assessments
                                                                                                                           based on that.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                   STILL HUNGRY
                                                                                                                   LIKE A WOLF?
                                                                                                                                   THE RATING
                                                                                                                                   JUNGLE
                                                                                                                                                    REGIONAL MARKET
                                                                                                                                                    UPDATES
                                                                                                                                                                      CONTACTS
                                                                                                                                                                                        <         >
MAPPING THE DNA OF RETAIL SUCCESS

“
We are collaborating on
a system which installs
                                             Not sure that’s where you’d make a start in this area of footfall
                                             analysis but there are some very interesting systems available.

                                             We are collaborating on a system which installs sensors across
                                             a shopping area that respond to mobile phones in the vicinity.
sensors across a                             This tracking means you can more accurately measure footfall,
                                             dwell time, and shopper routes.
shopping area that
respond to mobile                            And as data from different areas of retailing is gathered in greater
                                             quantities and correlated with shopper behaviour and integrated
phones in the vicinity                       with a brand’s online presence then it should be increasingly

”
                                             possible to map the DNA of retail success.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                           A NEW BREED
                                                           OF INVESTMENTS?
                                                                             MAPPING THE DNA
                                                                             OF RETAIL SUCCESS
                                                                                                 THE ADAPTABLE
                                                                                                 CAPITAL
                                                                                                                 STILL HUNGRY
                                                                                                                 LIKE A WOLF?
                                                                                                                                THE RATING
                                                                                                                                JUNGLE
                                                                                                                                             REGIONAL MARKET
                                                                                                                                             UPDATES
                                                                                                                                                               CONTACTS
                                                                                                                                                                          <   >
The Adaptable
                                                                                               Capital
EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                               STILL HUNGRY
                                                                                                               LIKE A WOLF?
                                                                                                                              THE RATING
                                                                                                                              JUNGLE
                                                                                                                                           REGIONAL MARKET
                                                                                                                                           UPDATES
                                                                                                                                                             CONTACTS
                                                                                                                                                                        <   >
CENTRAL LONDON

                                              The Adaptable
                                              Capital
                                              In the past, we have described London retail property as ‘a market apart’ because of its special
                                              characteristics and drivers.
                                              But that doesn’t mean it is immune to macro-economic factors and            However, this shot in the arm has been counterbalanced by the
                                              the sort of geopolitical turbulence that we’ve seen in the past year.       unveiling of the new business rates liabilities which, pro rata, have
                                                                                                                          hit London harder than the rest of the country. So where does this
                                              In short, the London market has cooled.                                     leave London’s retail property market?

                                              The annual double digit increases in prime rents have given way             Well, the London market is complex and multi-layered so, as our theme
                                              to an average rise of 3% in the year to the end of April.                   today is about how to adapt to new conditions, I thought it would be
                                                                                                                          useful today to look at how two shopping pitches –Tottenham Court
                                              Paradoxically, London retailing was a major beneficiary of the              Road and Bond Street – are adapting to the new trading environment.
                                              economic turbulence that followed the EU Vote. The drop in the
                                              value of the pound brought an influx of foreign shoppers looking
  Paul Souber                                 to take advantage of items that were, in effect, 20% cheaper than
                                              they had been on the day of the referendum.
     Head of Central London
     Retail Agency

EXECUTIVE
SUMMARY
             INTRODUCTION
                            THE EVOLUTION
                            OF RETAIL
                                            THE MARKET:
                                            VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                  THE RATING
                                                                                                                                  JUNGLE
                                                                                                                                                   REGIONAL MARKET
                                                                                                                                                   UPDATES
                                                                                                                                                                     CONTACTS
                                                                                                                                                                                      <       >
CENTRAL LONDON

  This chart shows the two locations and how their prime rents have
  progressed since 2000 with the black line showing average Central              London Rental Values
  London primes. Each location tells a different but relevant story              Zone A Rent: Index vs. 2000
  about London’s ability to adapt.

  Tottenham Court Road
  Not that long ago, Tottenham Court Road was the preserve of                              600
  electrical shops whose presence was punctuated by the Heal’s
  furniture store, the YMCA and the Dominion Theatre.                                      500

  That has all now changed as a new generation of retail is spreading                      400
  north up Tottenham Court Road from its junction with Oxford Street.

                                                                          Index vs. 2000
                                                                                           300
  The thoroughfare has an annual footfall of more than 18m, a large
  catchment of workers and a youthful academic population of over                          200
  160,000 students which contributes to the area having the highest
  percentage of people aged between 15 and 34 in the UK. Most                              100
  importantly, it offers the seven-day trading environment which
  retailers now look for.
                                                                                            0
                                                                                                 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011                2012 2013 2014 2015 2016 2017

                                                                                                                       Central London            Tottenham Court Road           Bond Street

                                                                            Source: Colliers International

EXECUTIVE
SUMMARY
                INTRODUCTION
                                THE EVOLUTION
                                OF RETAIL
                                                THE MARKET:
                                                VITAL SIGNS
                                                                A NEW BREED
                                                                OF INVESTMENTS?
                                                                                             MAPPING THE DNA
                                                                                             OF RETAIL SUCCESS
                                                                                                                 THE ADAPTABLE
                                                                                                                 CAPITAL
                                                                                                                                  STILL HUNGRY
                                                                                                                                  LIKE A WOLF?
                                                                                                                                                   THE RATING
                                                                                                                                                   JUNGLE
                                                                                                                                                                    REGIONAL MARKET
                                                                                                                                                                    UPDATES
                                                                                                                                                                                      CONTACTS
                                                                                                                                                                                                  <         >
CENTRAL LONDON

  Interestingly, as you can see from this graph, since 2000, rents on
  Tottenham Court Road grew faster than the Central London average                  Tottenham Court Road
  for most of the period. They dipped below the average in 2015 but                 Zone A Rent: Index vs. 2000
  are now closing the gap.

  This is largely due to the transformation of the shopping offer by new
  development. Derwent London’s Tottenham Court Walk established                              250
  a fresh tone and is now fully let. The Exemplar/Ashby Capital 70,000
  sq ft office development on the street will also provide five new prime
  retail units.                                                                               200

  The change in the office population in this area has been a major

                                                                             Index vs. 2000
                                                                                              150
  factor in the desire to create high quality retail. Facebook, Estee
  Lauder, Deliveroo, Freud Communications and NBC Universal have
                                                                                              100
  all chosen the immediate area around Tottenham Court Road for new
  office HQs. As a consequence, the shopping – and eating and drinking
  – scene is responding to the preferences of these new neighbours.                            50

  Prime rents are proving progressive and have risen by about 7.5%
                                                                                               0
  – more than double the Central London average – in the past year                                  2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
  to a present high of £250 Zone A.
                                                                                                                                    Central London           Tottenham Court Road
  Almacantar’s development of CentrePoint into luxury residential plus
  retail and leisure, the revamped Tottenham Court Road Crossrail
  station and with major public realm improvements on the way,
  the street is a good example of how the development of London’s
  business districts will continue to drive the need for retail.
                                                                                Source: Colliers International

EXECUTIVE
SUMMARY
                INTRODUCTION
                                 THE EVOLUTION
                                 OF RETAIL
                                                  THE MARKET:
                                                  VITAL SIGNS
                                                                   A NEW BREED
                                                                   OF INVESTMENTS?
                                                                                                MAPPING THE DNA
                                                                                                OF RETAIL SUCCESS
                                                                                                                    THE ADAPTABLE
                                                                                                                    CAPITAL
                                                                                                                                    STILL HUNGRY
                                                                                                                                    LIKE A WOLF?
                                                                                                                                                     THE RATING
                                                                                                                                                     JUNGLE
                                                                                                                                                                      REGIONAL MARKET
                                                                                                                                                                      UPDATES
                                                                                                                                                                                        CONTACTS
                                                                                                                                                                                                   <   >
CENTRAL LONDON

  Bond Street
  Bond Street is undoubtedly the most cited bellwether of the London                   Bond Street
  retail property market – although it is more an exception than a rule.               Zone A Rent: Index vs. 2000
  Since the year 2000, prime retail rents across Central London have
  more than doubled but along Bond Street they have increased
  by more than 400%.                                                                             600

  However, it’s time to dispel some myths about one of the world’s                               500
  most prime shopping pitches.
                                                                                                 400
  What Bond Street isn’t:

                                                                                Index vs. 2000
  It’s not an impregnable environment which isn’t subject to the factors                         300
  which shape property fundamentals generally.
                                                                                                 200
  If it were immune to the economic factors that are currently in play
  then there would not be around 30 leases quietly being marketed                                100
  along the street.
                                                                                                  0
  It is not a place where brands will simply write-off the cost of being                               2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
  there because it is just part of a bigger global marketing strategy:
  the price of using the Bond Street label.
                                                                                                                                           Central London            Bond Street

  If that ever was the case then it is not how it is today.

  Ralph Lauren’s flagship store on New York’s Fifth Avenue was also
  thought to be just a very expensive marketing exercise. Well, it closed
  earlier this year and that street is also facing further brand departures.
                                                                                   Source: Colliers International

EXECUTIVE
SUMMARY
                 INTRODUCTION
                                   THE EVOLUTION
                                   OF RETAIL
                                                    THE MARKET:
                                                    VITAL SIGNS
                                                                      A NEW BREED
                                                                      OF INVESTMENTS?
                                                                                                   MAPPING THE DNA
                                                                                                   OF RETAIL SUCCESS
                                                                                                                       THE ADAPTABLE
                                                                                                                       CAPITAL
                                                                                                                                       STILL HUNGRY
                                                                                                                                       LIKE A WOLF?
                                                                                                                                                        THE RATING
                                                                                                                                                        JUNGLE
                                                                                                                                                                          REGIONAL MARKET
                                                                                                                                                                          UPDATES
                                                                                                                                                                                            CONTACTS
                                                                                                                                                                                                       <   >
CENTRAL LONDON

“
We predict average
prime rents across
                                             What Bond Street is:
                                             What Bond Street is a hugely strong luxury pitch for which there
                                             will always be demand.

                                             There are leasing deals going on in the street right now but there
                                                                                                                          The Adaptable Capital
                                                                                                                          Because of its scale and mass, the London retail property market
                                                                                                                          has never been a simple case of boom or bust.

                                                                                                                          Different locations in the capital progress at different speeds and
London will be flat                          will be fewer of the astronomical premiums that we have seen                 the established pitches must adapt to changing circumstances.
                                             in the past few years.
during the next                                                                                                           We predict average prime rents across London will be flat during
12 months                                    It’s easy to forget that ‘Bond Street’ – as we generically like to term      the next 12 months.
                                             it – is actually three distinct pitches which have different identities

”
                                             and strengths.                                                               There is no question that the market will be tougher than it has been
                                                                                                                          for a considerable period, and we must appreciate that retailers’
                                             There is the northern end which stretches from Oxford Street down            margins are being squeezed on every front.
                                             to Fenwicks. The retailing tone then changes and gets more high-end
                                             from Fenwicks down to Sotheby’s. And finally there is the super luxe         London’s shopping scene will have to adjust to the increased
                                             enclave of fashion and jewellery which runs through to the junction          occupational costs driven by higher rates bills and absorb the space
                                             with Piccadilly.                                                             flowing into the market from more than 2m sq ft of new shopping
                                                                                                                          developments.
                                             All of these pitches have different characteristics, but all need to be
                                             viewed with the same realism as any other retail environment.                The extension of Westfield London will make it the biggest shopping
                                                                                                                          centre in the UK and is scheduled to complete next year.
                                             Bond Street is certainly not resting on its laurels. Westminster City
                                             Council in collaboration with New West End Company, Transport                The fact that London can absorb this scale of development while
                                             for London and West End Partnership is moving ahead with plans               fostering new retail pitches is testament to its ability to adapt.
                                             to for a £10m rejuvenation of the street’s public realm to raise the
                                             bar further for this world-class retail environment. This couldn’t
                                             come at a better time.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                  THE RATING
                                                                                                                                  JUNGLE
                                                                                                                                                    REGIONAL MARKET
                                                                                                                                                    UPDATES
                                                                                                                                                                      CONTACTS
                                                                                                                                                                                        <         >
Still Hungry
                                                                                                      like a Wolf?
                                                                                                      PRESS PLAY TO WATCH THE FILM

                                                                                                        Eating and drinking in all its forms have been a major
                                                                                                        driver of occupier demand across retail environments
                                                                                                        in the past few years. But is the sector’s appetite
                                                                                                        beginning to wane?

                                                                                                               DOWNLOAD TRANSCRIPT

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                                STILL HUNGRY
                                                                                                                LIKE A WOLF?
                                                                                                                                THE RATING
                                                                                                                                JUNGLE
                                                                                                                                                REGIONAL MARKET
                                                                                                                                                UPDATES
                                                                                                                                                                  CONTACTS
                                                                                                                                                                             <   >
The Rating
                                                                                                               Jungle

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                               STILL HUNGRY
                                                                                                               LIKE A WOLF?
                                                                                                                              THE RATING
                                                                                                                              JUNGLE
                                                                                                                                           REGIONAL MARKET
                                                                                                                                           UPDATES
                                                                                                                                                             CONTACTS
                                                                                                                                                                        <   >
THE RATING JUNGLE

                                              ‘Impossible’ appeals system
                                              adds to Rating woe
                                              The start of the 2017 Rating Revaluation has had major implications for the Retail sector, particularly
                                              in high value areas and in towns and cities which have seen major decline. However, the impact
                                              on the rest of the country, particularly those which have seen any element of decline in values
                                              from 2008 to date, has not been reflected in Rateable Values as greatly as was hoped.
                                              In a difficult time, when the retail sector in particular has seen the high   Of course there are promises of more to follow, but the impact for
                                              street hit by a major recession, ratepayers were hoping for a full            ratepayers is very much being felt right now, with large assessments
                                              Rating reform which was promised by the Government in Spring 2015.            losing the benefits of transitional relief within 18 months and ratepayers
                                                                                                                            with properties in areas which have declined not feeling the benefit
                                              However, despite a huge amount of research taking place, which                by more than 6% per annum.
                                              included HMRC engaging with key stakeholders ranging from
                                              major landlords through to small businesses, once again the decision          Some areas of Central London have seen increases of up to 400%
                                              was made just to tinker around the edges rather than to completely            in their assessments with suburban areas still seeing up to 100%
  John Webber                                 reform the system. There were issues which as at the valuation                increase. There are huge inconsistencies in the Rating valuations
                                              date of 1 April 2015 which are still ongoing relating to resourcing           around the country with some areas being true to values within
     Head of Rating                           of the Valuation Office Agency, the growth of the digital sector              the market and some showing huge discrepancies.
                                              and vacancy rate of up to 15% on High Streets.
                                                                                                                            This has to be a direct impact of the lack of resource within the
                                                                                                                            Valuation Office Agency leading to little co-ordination across
                                                                                                                            the country.

EXECUTIVE
SUMMARY
             INTRODUCTION
                            THE EVOLUTION
                            OF RETAIL
                                            THE MARKET:
                                            VITAL SIGNS
                                                             A NEW BREED
                                                             OF INVESTMENTS?
                                                                                MAPPING THE DNA
                                                                                OF RETAIL SUCCESS
                                                                                                    THE ADAPTABLE
                                                                                                    CAPITAL
                                                                                                                    STILL HUNGRY
                                                                                                                    LIKE A WOLF?
                                                                                                                                     THE RATING
                                                                                                                                     JUNGLE
                                                                                                                                                       REGIONAL MARKET
                                                                                                                                                       UPDATES
                                                                                                                                                                         CONTACTS
                                                                                                                                                                                            <       >
THE RATING JUNGLE

“
The new Check,
Challenge, Appeal
                                             For example, areas of the South West have seen decreases in towns
                                             such as Torquay and Weymouth in rental levels of 50% but the Rateable
                                             Values have fallen by under 40%. The opposite of that has happened
                                             in St Ives where rental levels have increased by 23% but Rateable
                                             Values have increased by 60% in prime spots. The assessments
                                                                                                                         The new Check, Challenge, Appeal system is proving to be very
                                                                                                                         problematic with personal details needing to be provided to create
                                                                                                                         a username before navigating through the website to eventually get
                                                                                                                         to the Check stage, and what might follow is a 30-month appeals
                                                                                                                         process. This is in addition to the 300,000 appeals which are
system is proving to                         simply do not reflect what has happened in the market.                      outstanding from the 2010 Rating List.
be very problematic                          In the West Midlands, Nuneaton, for example, has seen rental levels         We are working hard to influence the Valuation Office Agency to

”
                                             fall by 50% but the VO has only partially reflected this by dropping        resolve outstanding issues and clear appeals as soon as possible,
                                             RVs by 20%. This has also been seen in many towns across Wales.             explaining the impact on our clients’ liabilities. We remain optimistic
                                                                                                                         that the Government will understand the medium and long-term
                                             Business Rates has a massive impact on the success or otherwise             impact of an impossible appeals system.
                                             of a business and retailers have been struck in this turbulent period
                                             more than other sectors. The revaluation of food stores which, in many      The High Street desperately needs a boost to continue to fill their vacant
                                             cases, have changed from being valued on a zoned basis to overall           units and, with the allocation of discretionary relief being so infrequent
                                             and have seen massive growth, will be hit with large rates bills            and liabilities being excessive with little chance of a successful
                                             affecting their profitability, despite high demand in the sector            appeal in the near future, this is not going to help their success.
                                             leading to competitor openings.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                           A NEW BREED
                                                           OF INVESTMENTS?
                                                                             MAPPING THE DNA
                                                                             OF RETAIL SUCCESS
                                                                                                 THE ADAPTABLE
                                                                                                 CAPITAL
                                                                                                                 STILL HUNGRY
                                                                                                                 LIKE A WOLF?
                                                                                                                                  THE RATING
                                                                                                                                  JUNGLE
                                                                                                                                                    REGIONAL MARKET
                                                                                                                                                    UPDATES
                                                                                                                                                                      CONTACTS
                                                                                                                                                                                         <       >
Regional
                                                                                                               Market
                                                                                                               Updates
                                                                                                                       SOUTH EAST & OUTER LONDON

                                                                                                                       SOUTH WEST & WALES

                                                                                                                       MIDLANDS

                                                                                                                       NORTH WEST

                                                                                                                       YORKS/HUMBERSIDE/NORTH EAST

                                                                                                                       SCOTLAND

                                                                                                                       NORTHERN IRELAND

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                         A NEW BREED
                                                         OF INVESTMENTS?
                                                                           MAPPING THE DNA
                                                                           OF RETAIL SUCCESS
                                                                                               THE ADAPTABLE
                                                                                               CAPITAL
                                                                                                               STILL HUNGRY
                                                                                                               LIKE A WOLF?
                                                                                                                              THE RATING
                                                                                                                              JUNGLE
                                                                                                                                           REGIONAL MARKET
                                                                                                                                           UPDATES
                                                                                                                                                             CONTACTS
                                                                                                                                                                        <   >
SOUTH EAST & OUTER LONDON

                                              A period of
                                              consolidation
                                              The last 12 months have very much been a period of consolidation for rents with little growth in rents
                                              across the region. The key areas of activity have been the extensive development pipeline and the
                                              impact of the ex-BHS space on this region.
                                              Development Everywhere                                                      are involved with include extensive refurbishments at The Dolphin
                                              The region is seeing a really strong pipeline of new development            Centre in Poole, The Square in Camberley and The Brooks in
                                              and centre extensions. Important new centres will open in Oxford            Winchester all starting this Summer.
                                              and Bracknell this Autumn and the occupier market is responding
                                              well to both centres.                                                       The BHS Effect
                                                                                                                          The BHS failure in April 2016 delivered over 160 large stores into
                                              Other notable development are now on site including the Arndale             an occupier market with a fragile capacity to absorb the space.
                                              Centre extension in Eastbourne having finally restarted after a long        A year on, the story nationwide makes for difficult reading with
                                              delay to secure joint venture funding, Hammerson’s Phase 2 of               the majority of the stores still empty.
                                              The Orchard Centre in Didcot, intu’s extension at Watford, and the
  Dan Simms                                   Tunsgate Quarter in Guildford. Looking to later 2017, Bargate Quarter       The picture in the South East is more positive. Of the 13 stores within
     Head of Retail Agency – South            in Southampton should also join this large and diverse group                the M25, 11 have either been let, are under offer or redevelopments
                                              of developments on site.                                                    are progressing. Notable examples of the wide range of replacement
                                                                                                                          tenants across the region include Morleys in Bexleyheath, Decathlon
                                              It is also worth highlighting the significant capital investment that a     in Uxbridge, Zara in Brighton, Aldi and The Gym in Walthamstow,
                                              number owners are committing to refurbishments and improvements             Primark in Harrow, Sports Direct in Norwich and Watford and
                                              of existing shopping centres – examples that the Colliers retail team       The Range at Surrey Quays.

EXECUTIVE
SUMMARY
             INTRODUCTION
                            THE EVOLUTION
                            OF RETAIL
                                            THE MARKET:
                                            VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                  THE RATING
                                                                                                                                  JUNGLE
                                                                                                                                                   REGIONAL MARKET
                                                                                                                                                   UPDATES
                                                                                                                                                                     CONTACTS
                                                                                                                                                                                       <       >
SOUTH EAST & OUTER LONDON

“
Retailer demand
continues to be robust
                                             Rental Growth
                                             The strong growth seen across the London Suburbs during the period
                                             from 2014-2016 with 5% average increases for three consecutive
                                             years, appears to have petered out with only a 1% average increase
                                             over the last 12 months. This area is notable though in showing
                                                                                                                         Outlook
                                                                                                                         The development pipeline will really set the tone for the retail market
                                                                                                                         in this region over the next 12 months and we expect many of the
                                                                                                                         most notable deals to be focussed on these schemes and also centres
                                                                                                                         where redevelopment programmes start to generate new
for the higher quality                       average rental values at 11% above 2008 – the best long-term                occupier demand.
                                             performance of any area outside of Central London – for example,
centres in the London                        our team has let almost 60,000 sq ft of space at intu Uxbridge over         Prime Rents
Suburbs                                      the last 12 months to retailers including Decathlon, Next and               ■ Prime rental growth across the region of 0.5%.

”
                                             Toys R Us.
                                                                                                                         ■   The pattern of polarisation is exemplified in the South East. In the
                                             Rental performance in the South East also marked time, with                     year to end of April 2017, prime rents increased in 10 locations
                                             average rents static and still 16% lower than their peak in 2008.               out of 60, and have decreased in four locations.

                                             East Anglia fared marginally better with a 1% increase in rents             ■   Bluewater continues to have the highest prime rents in the
                                             but the average remains at 20% below peak.                                      South East, and have remained stable at £410 per sq ft.

                                                                                                                         ■   There has been some softening of prime rents across Oxford
                                                                                                                             as space in the soon-to-open Westgate shopping centre has
                                                                                                                             come on-stream.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                           A NEW BREED
                                                           OF INVESTMENTS?
                                                                             MAPPING THE DNA
                                                                             OF RETAIL SUCCESS
                                                                                                 THE ADAPTABLE
                                                                                                 CAPITAL
                                                                                                                 STILL HUNGRY
                                                                                                                 LIKE A WOLF?
                                                                                                                                   THE RATING
                                                                                                                                   JUNGLE
                                                                                                                                                    REGIONAL MARKET
                                                                                                                                                    UPDATES
                                                                                                                                                                      CONTACTS
                                                                                                                                                                                       <       >
SOUTH EAST & OUTER LONDON

“
The region has coped
better with the ‘BHS
                                             Development
                                             ■ 2.9m sq ft of additional shopping centre space is set to open

                                             ■
                                               over the next five years.

                                                 2017 is a significant year for developments in the South East.
                                                                                                                          Key Takeaways
                                                                                                                          ■ Strong pipeline of new development and centre extensions

                                                                                                                          ■
                                                                                                                            driving the market.

                                                                                                                              The region has coped better with the ‘BHS effect’ than
effect’ than the rest                            The Westquay Watermark leisure development has recently                      the rest of the UK.
                                                 opened in Southampton, and later this year will see the opening
of the UK                                        of Oxford Westgate, The Lexicon in Bracknell, Tunsgate Quarter               Rental growth at 1%.

”
                                                                                                                          ■

                                                 Guildford and Addlestone ONE.

                                             ■   There is a further 394,000 sq ft of net retail warehouse space
                                                 due to open over the next two years in locations including
                                                 Chichester, Margate and Sittingbourne.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                    THE RATING
                                                                                                                                    JUNGLE
                                                                                                                                                     REGIONAL MARKET
                                                                                                                                                     UPDATES
                                                                                                                                                                       CONTACTS
                                                                                                                                                                                       <   >
SOUTH WEST & WALES

                                                 A platform
                                                 for growth
                                                 In the past 12 months, around 40% of the locations which we monitor in the South West recorded
                                                 an increase in average prime rents. This is five times more locations to chart rises than in the
                                                 previous reporting period. This resulted in an overall positive rental growth for the South West
                                                 of 2.5% – the highest outside London and the South East.
                                                 Bristol prime rents were up 6% while Exeter is now at its highest            The barometer of demand over the last year has been the fate of
                                                 level since 2008. Some smaller markets have seen double-digit                the former BHS units. In Bristol, the unit in Broadmead is to be
                                                 growth – Christchurch prime Zones As are up 19% and they have                occupied by Metro Bank and potentially TK Maxx. Poundland has
                                                 risen 13% in Falmouth.                                                       combined with gym operators to take the former department stores
                                                                                                                              in Exeter and Taunton. Wilko has taken the Truro unit but the Torquay,
                                                 It now appears that after a prolonged period of stabilisation, the region    Plymouth and Weston-super-Mare stores are still looking for occupiers.
                                                 is now moving forward with re-based rents, sustained occupier
                                                 demand and relatively constrained supply.                                    Cheltenham is one of the region’s strongest retail centres with good
  Nick Turk                                                                                                                   affluence levels, a refurbished Regents Arcade, low vacancy rates
                                                 Wales is not as positive a story with only four centres showing              and a new John Lewis due to open shortly.
     Director                                    an increase in rents (Aberystwyth, Caerphilly, Carmarthen and
                                                 Haverfordwest). The main highlight of the year was the opening               Occupier demand remains highly selective and this is also reflected
     Retail Lease Advisory                       of Friars Walk in Newport where lettings have helped boost the               in the retail warehouse sector where planned new schemes are
                                                 overall prime rental profile in Wales.                                       competing for occupiers.

EXECUTIVE
SUMMARY
                INTRODUCTION
                               THE EVOLUTION
                               OF RETAIL
                                               THE MARKET:
                                               VITAL SIGNS
                                                                A NEW BREED
                                                                OF INVESTMENTS?
                                                                                  MAPPING THE DNA
                                                                                  OF RETAIL SUCCESS
                                                                                                      THE ADAPTABLE
                                                                                                      CAPITAL
                                                                                                                      STILL HUNGRY
                                                                                                                      LIKE A WOLF?
                                                                                                                                      THE RATING
                                                                                                                                      JUNGLE
                                                                                                                                                       REGIONAL MARKET
                                                                                                                                                       UPDATES
                                                                                                                                                                         CONTACTS
                                                                                                                                                                                           <      >
SOUTH WEST & WALES

“
39% of South West
locations recorded
                                             As an example, Truro has strong retail demand and The Hendra
                                             Retail Park looks the most likely to be developed out with Aldi and
                                             Boots as confirmed tenants. Other towns and cities in the South
                                             West have very little vacant accommodation on retail parks but
                                             equally they have been unable to move rents on.
                                                                                                                          ■   The increases have been by locations such as Christchurch
                                                                                                                              (up 19% to £47.50 per sq ft) and Falmouth (up 13% to £45 per
                                                                                                                              sq ft), as well as the main retail hubs in Exeter (up 11% to £200
                                                                                                                              per sq ft, its highest level since 2008) and Bristol (up 6% to £170
                                                                                                                              per sq ft).
rental increases
                                             Last year we spoke positively about the food & beverage sector                   The South West exemplifies the polarisation of retail; alongside
– more than double
                                                                                                                          ■

                                             market and how it was driving demand. Since then, the faltering                  an increase in rents, 11% of locations also saw a decline
the UK average                               steps of some operators like the Restaurant Group have checked                   (compared to 0% in 2016).

”
                                             the market for dine-in restaurants although the thirst for coffee
                                             stores seems unquenchable.                                                   ■   Wales recorded average prime rental growth of 3.1%, but this
                                                                                                                              was heavily influenced by new lettings at Friars Walk in Newport
                                             Prime Rents                                                                      which took prime rental levels up by 150% from £30 per sq ft
                                             ■ There has been rental growth across the South West of 2.5%                     to £75 per sq ft.
                                               – the highest in England (excluding London and the South East).

                                             ■   39% of South West locations recorded rental increases
                                                 – more than double the UK average.

EXECUTIVE
SUMMARY
            INTRODUCTION
                           THE EVOLUTION
                           OF RETAIL
                                           THE MARKET:
                                           VITAL SIGNS
                                                            A NEW BREED
                                                            OF INVESTMENTS?
                                                                              MAPPING THE DNA
                                                                              OF RETAIL SUCCESS
                                                                                                  THE ADAPTABLE
                                                                                                  CAPITAL
                                                                                                                  STILL HUNGRY
                                                                                                                  LIKE A WOLF?
                                                                                                                                    THE RATING
                                                                                                                                    JUNGLE
                                                                                                                                                     REGIONAL MARKET
                                                                                                                                                     UPDATES
                                                                                                                                                                       CONTACTS
                                                                                                                                                                                         <       >
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