RCA Insights

Cheer in Short Supply for UK’s Retail Sector

By on December 17th, 2019

The recent news surrounding one of the U.K.’s biggest property funds halting redemptions has pushed the performance of the U.K. retail sector into the spotlight again. The bad news rounds out a torrid year for the sector. 

Just £4.5 billion ($6.0 billion) of U.K. retail assets has changed hands in 2019 so far. With just around £500 million in contract, it is highly unlikely that volume will surpass the previous annual low for activity — £6.7 billion recorded in 2001. Moreover, just 338 properties have traded so far, which is less than half the number recorded back in 2001.

This poor performance is reflected in pricing. The RCA CPPI for U.K. retail showed a 9.1% year-over-year drop in prices in Q3 2019, which is the worst outturn since 2009. Average transaction yields have moved out too, and they currently sit at 6.5%, the highest since 2013.

Previously, it might have been possible to stratify the market regionally. However, even in London volume is down at an 11-year low, and in the West End – London’s prime and super-prime shopping district – just three properties have sold this year.

As a sign of where the market is, U.K. local authorities are the fourth biggest group of buyers of retail assets in 2019, and have spent £680 million on 37 assets. The largest deal was Gloucester City Council’s acquisition of a retail park from Hammerson for £54 million. Since 2016, U.K. institutions and REITs have sold £1.1 billion of U.K. retail property to local authority buyers.

The only part of the market that is doing relatively well is the long-lease, grocery-anchored segment. Volume for 2019 through the end of November was £1.3 billion, higher than the full-year tallies for 2018 and 2017. In April, U.S.-based listed player Realty Income Corp spent £429 million on a portfolio of assets let to grocer Sainsbury’s with a weighted average lease term of 15 years. This was their first investment outside the U.S.

With little or no sign that the occupier market is starting to bottom out and given where investor sentiment sits, it is highly unlikely that 2020 will see a substantial recovery. Yes, there might be opportunities for some of the distressed players to move in and, clearly, there are always deals to be done in some segments, but another year of low volumes and falling prices is on the cards.


Also on RCA Insights:

As UK Election Nears, How Is Investor Activity Faring?

Chart: Cap Rates of US Grocery Retailers


Tom Leahy

Tom Leahy

Senior Director, EMEA Analytics

Tom Leahy joined RCA in 2014. In his role as Senior Director for the EMEA region, Tom is responsible for the development and expansion of the market analytics service for RCA’s European clients.

Prior to joining RCA, Tom was an Associate Director and then Head of Research at UK-based property consultancy, Lambert Smith Hampton. He started his career as an analyst at research consultancy Property Market Analysis (PMA).