summer 2013 out-of-town retail & leisure - knight frank · 4-15-10-5 0 5 10 15 may 07 may 08...
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Highlights• Whileoveralleconomicgrowthisexpectedtobeweakfor2013,recentdatasuggeststhatthemacrooutlookfortheUKisimproving.
• However,intheout-of-townretailmarket,headlinerentshavefallenandcontinuetoedgedowninmanylocations.Thisisduetogeneralmarketweaknessandalsototheincreasingdominanceofdiscountretailers,whotakeamoreaggressiveapproachtopropertycosts.
• Yieldsforbetterqualityretailparkassetshavebeenhardening;conversely,valuesformoresecondaryassetshavefallen.Yieldsforprimeleisureassetsmeanwhilearenowwithin75-100bpsoftheirprimeretailequivalents.
• Out-of-townretailinvestmentvolumesfortheyeartoMay2013areinlinewith2012,whileleisureinvestmentvolumes(excludinghotelsbutincludingpubs)almostreached£500million.
research
Summer 2013
out-of-town retail & leisureOccupational&investmentmarkets
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Summer 2013OUT-OF-TOWN RETAIL AND LEISURE Occupational&investmentmarkets
Economic overviewThe second estimate for Q1 2013 GDP confirmed that the UK economy grew by 0.3%, driven by a strong contribution from the service sector (0.6%) and a smaller contribution from production (0.2%). On the downside, the construction data was weak (-2.4%), as was manufacturing, which declined for the second successive quarter (-0.3%).
However,onapositivenote,thelatestforward-lookingPMIsurveyshavebeenmoreupbeatacrossthemanufacturing,constructionandservicesectors.Therearealsosignsthatconsumerconfidenceisreturning,followingalongperiodofgloom,withGfK’sconsumerconfidenceindexrisingby5pointsinMay.Whiletheoverallfigureremainsnegativeat-22,therecentimprovementcontinuesamoreupbeattrendseensincethestartof2013,whichhasbeenreflectedinthelatestretailsalesdata.
Theinflationpicturehasmarginallyimprovedinrecentmonths,butremainsabovetargetandsomewhat“sticky”.Indeed,ONSdatashowedthatCPIinflationrosefrom2.4%to2.7%inMay,higherthanmostforecasts,onthebackofariseintransportandclothingcosts.TheincreasetakestheheadlinerateofinflationbacktothelevelsseenbetweenOctober2012andMarch2013.
Recentpaygrowthfiguresmeanwhileshowamarginalimprovement–albeitstillrunningathalftherateofinflation–withthethree-monthaveragefigurerisingto1.3%forApril.Whilethepressureonconsumers
hasthereforeeased,realincomesarestillbeingsqueezed.
UnemploymentremainsoneofthebrighterspotsoftheUKeconomyandremainsverylowincomparisonwithmanyEuropeancountries.TheunemploymentrateforFebruarytoAprilwas7.8%,unchangedonthepreviousthreemonths,withthenumberofpeopleoutofworkdecliningbyjust5,000to2.5million.ThemoreprecisecountofJobseeker’sAllowanceshowedafallof8,600to1.51millioninMay.
TheoutlookcontinuestoimproveformostpartsoftheUK,althoughthepathtoamoresustainedrecoverywillremainslowandbumpyandwillvarybyregion.MediumtermforecastssuggestthatthestrongesteconomicgrowthwillbeinLondonandtheSouthEast.Relativelyhighlevelsofemploymentandimprovingconsumerconfidenceshouldfilterthroughtoconsumerspendingastheyearprogresses.
TheEurozoneremainsweakbutatleastappearsmorestableand,despitehighunemployment,positivegrowthhasreturnedtotheUS.
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CPI and pay growth
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Trends – Discount retailers
KnightFrank.com
The out-of-town retail landscape has changed significantly in recent years, with the balance of power now firmly in the hands of the discounters. While the property industry may have reservations about some of these brands, consumers have clearly embraced the value end of the market.
Anumberofdiscountershaveundergonedramaticexpansion.TheseincludeoperatorssuchasPoundworld,whichwasfoundedin1997andnowhasover170stores,ofwhicharound120areout-of-town,withanother170storestargeted.Similarly,99pStores,whichwasfoundedin2001,nowhasover190stores,aidedbytheadditionofover40formerWoolworthsstores.Thecompanyalsotradesout-of-townasFamilyBargains.Bothcompanieshaveachievedverystrongsalesgrowthinanenvironmentoflowmarginsandfiercecompetition.Indeed,Poundlandrecentlyreducedsomepricesto97ptoundercutits99privals.
Inthediscountfoodsector,Aldi’ssalesgrowthhaseasilyoutpaceditslargerrivals,withgrowthof31.5%in2012.Ithasgainedsignificantmarketsharethroughitsofferofcheaperversionsofclassicproducts,withoutcompromisingonquality.
Analysissuggeststhattheleadingdiscountershavesomeofthehighestprofitmarginsintheretailsector,withDunelmat15.8%(source:OrielSecurities).Whilethestrengthofdemandfromtheseoperatorsshouldintheorydrivehigherrents,therealityisthattheyareveryfocusedonmarginsandcostsinthecurrentenvironment–includingproperty.
Figure4aboveshowstherentspaidbysomeofthemoreaggressiveretailersin
recentyears,includingfourofthetopfivespacetakersin2012.Acomparisonofthisdataagainstsomeofthemoreestablishedout-of-townplayerssuggeststhatheadlinerentshavefallensteadily.Therefore,whilelandlordshavebeenabletofillthevoidsleftbyretailerclosures,thishasbeenattheexpenseoflowerrents.TheonlyestablishedplayerinthetopfivespacetakersisTKMaxx,whichisexpandingtotakeadvantageofstrongconsumerdemandforqualityproductsatlowprices.However,theaveragerentontheirexistingstoreportfolioishigherthanthemorerecentlyestablishedplayers.
AveragerentsforTheRangeacrossasampleof54storesis£10.55persqft,whileB&Mpaysjust£11.71persqftacrossasampleof91stores.Thesefiguresaremuchlowerthanforthemoreestablishedoperatorswhichexpandedbeforetherecession.Carpetrightforexamplepays£18.64persqftonaverage(basedonasampleof294),whileMothercare’saveragerentacrossasampleof85storesis£23.26persqft.
Discount retailers take over
1 million sq ft of new space in 2012
Top 5 increases in floor space in 2012
• B&M–410,000sqft
• Kiddicare–350,000sqft
• Dunelm–250,000sqft
• TKMaxx–240,000sqft
• HomeBargains–230,000sqft
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Figure4Discount retailers
Source:TrevorWoodAssociatesNumbersinbracketrelatetosamplesizeofstoreforeachretailer
Withallretailsalesupby1.9%year-on-year,itprovidesaboostforamoresustainedrecoveryinthewidereconomy,despitefearsthatacontinuedsqueezeonhouseholdearningscouldputthebrakesonanygrowth.
Vacancyratesonretailparksedgedupto9.9%(source:TrevorWoodAssociates)attheendof2012,comparedwith9.1%intheprevioussixmonths.Thisisthebiggestincreasesince2008andwaslargelydrivenbythecollapseofComet,JJBSportsandPeacocksduringthesecondhalfof2012.ThisfigureobviouslydoesnottakeintoaccountthefailureofHMV,DreamsandBlockbusterinthefirstquarterofthisyearanditremainstobeseenwhetherthevacancyrateswillcontinuetoedgeupastake-uplevelssoften.
Data from the ONS for May showed that retail sales of non-food (2.2%) increased over the year, while sales of both food and household goods remained weak, falling by 0.5% and 3.4% respectively, reflecting the recent trading performance of a number of key retailers in the out-of-town sector.
Thereremainsadegreeofcautiontowardssomeretailers,thoughthe‘watchlist’hasshortened.Thereisevidenceofdemandfromawidearrayofmoresecureretailersfromdiscounterstofashionbrands.However,thisdemandisatarentallevelbelowmostlandlords’aspirations.Whilstthisisnotsurprising,thefactthatsomanyretailersareattemptingtopursueexpansionstrategiesisapositive.
IPDfiguresforMaysuggestthatrentalgrowthintheretailwarehousesectorwasmildlynegativeonamonthlybasisat-0.05%,withanannualdeclineof-0.78%.However,itremainsthebestperformingsectorcomparedwithshoppingcentresandhighstreets.
Out-of-town retail Occupier market
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Figure5All retail sales, household goods & automotive fuel
Source:ONS(volumeyear-on-yeargrowth)
Summer 2013OUT-OF-TOWN RETAIL AND LEISURE Occupational&investmentmarkets
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Figure6Annual rental growth
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The second quarter saw approximately £444m worth of out-of-town investment deals (although 27% was made up of large portfolio sales), showing a 146% increase in volume on the previous quarter and a 25% increase in the number of transactions. RecentkeytransactionsincludethesaleofColiseumShoppingParkinEllesmerePort.TheCrownpurchasedtheparkfromEquitableLifefor£81m,reflectingareportedNIYof5.25%.Inaddition,KKRandQuadrantEstatesrecentlycompletedthepurchaseoftheTuscanyretailparkportfoliofromResolutionfor£112.5m.
WhilstthegoodsecondaryOpenA1markethasbeenquietinthelast18months,Q2witnessedtwodeals,includingtheacquisitionofGalaRetailParkinGalashielsbyPrudentialforc.£11.2m(reflectingaNIYof6.25%)andthepurchaseofSuffolkRetailParkinIpswichbyOrchardStreetfor£18.75m(reflectingaNIYof7.10%).
GallionsReachShoppingParkinBecktoncametothemarketinMaywithaquotingpriceof£110m,reflectinganetinitialyieldof6.00%.Theavailabilityofprimesolusstockhasbeenlimited,althoughtherehavebeentwobenchmarktransactions,namelytheWickesinBicesterwhichsoldfor£5.7m,reflectinganetinitialyieldof6.15%,andtheB&QunitinSouthend-on-Seawhichsoldfor£24.25m,reflectinganetinitialyieldof6.50%.
Overallinvestorsentimentismorepositivethanearlierthisyear.However,thereis
stilladegreeofyieldpolarisationbetweenprimeandsecondaryassets,inparticularthebulkygoodssectorwhererentsareunderpressure.YieldsforprimeOpenA1schemeshardenedfrom5.35%to5.25%inJune,whileyieldsforprimeBulkyGoodsparksmovedoutto6.50%.Weexpectthistrendtocontinue.
Major retail investment transactions
Retail Park Purchaser Vendor Price NIY (£m) (%)TuscanyPortfolio KKRandQuadrantEstates Resolution 112.5 7.50
StoneLakeRetailPark,London Aberdeen LXB 32.95 6.50
PurleyWay,Croydon StandardLife Aviva 31.70 5.90
AngliaRetailPark,Ipswich StarwoodCapital ELAS 29.50 7.80
SuffolkRetailPark,Ipswich OrchardStreet Aberdeen 18.75 7.10
LadyBayRetailPark, Threadneedle LaSalleIM 16.30 8.80Nottingham
GalaRetailPark,Galashiels Prudential Aviva 10.87 6.40Source:Propertydata.com,KnightFrank
Investment market
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Figure9Retail warehouse investment transactions
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Figure7Prime out-of-town retail yields
Source:KnightFrank
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Figure8Long-term retail warehouse yields
Source:IPD
Unsurprisingly,openingsinbothsectorsdeclinedin2009.However,2012sawatleastfourtimesthenumberofnewA3(casualdining)openingsonretailparks,comparedwithfastfoodoutlets.
Operatorsarecurrentlyfacedwithhowtogrowturnoverinaweakconsumerenvironment.Theanswerhasmainlybeenorganicgrowth,particularlyamongstthecasualdiningoperatorssuchasASK,PizzaExpress,Nando’s,Frankie&Benny’sandTGIFridays.Thesebrandshavetraditionallybeenseeninthehighstreet,shoppingcentresand/orleisureschemes.
Mostofthesecompanieshavechosentolocateonshoppingparks,wherethetypeofconsumersandlongopeninghourscreateanattractivelocationforrestaurants.Indeed,
unlikesomeout-of-townleisureschemes,shoppingparksoftentradesuccessfullythroughouttheday.Ouranalysisshowsthattheaveragerentacrossasampleof206restaurantsonretailparksis£24.36persqft,withtheaveragesizeofunitsbeing3,450sqft.
Therapidincreaseofrestaurantoperatorsonout-of-townretailparksreflectstheirdesiretogroworganicallyandchangingconsumerhabits,wherebyeatingouthasbecomeamoreimportantpartoftheshoppingexperience.
Tesco’srecentacquisitionofGiraffemightsetatrendformorerestaurantsinout-of-townsuperstores.Thiscouldallowsupermarketstomakeuseofspacenolongerrequiredforelectricalgoods,aswellasmeetingconsumerdemandforcasualdiningwhileshopping.
Fastfoodopeningshavefallensignificantly,inpartduetosaturationincertainlocations.Itisalsobecauseofchangingconsumerpreferencesandlandlordsseekingabetterqualityofferwhichcomplementstheretailexperience–notjust‘grab&go’.Thedrive-thrumodeladdslimitedvaluetotheretailmixandisunlikelytoimprovefootfalland/ordwelltime.
The expansion of the casual dining restaurants such as Frankie & Benny’s and Nando’s into out-of-town retail parks began in earnest in 2007 – somewhat behind the traditional fast food outlets such as McDonald’s, which peaked over ten years ago.
Summer 2013OUT-OF-TOWN RETAIL AND LEISURE Occupational&investmentmarkets
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Casual dining on retail parks
BIRMINGHAM FORT add value wITH
RECENT LETTINGS to HARVESTER AND FRANKIE & BENNY’S
*Relatesonlytoopeningssince1997,asdataisnotavailablebeforethisdate
Occupier marketTheleisureoccupationalmarketcontinuestogofromstrengthtostrength,perhapswiththeexceptionofpubsandthelatelicence/nightclubvenues.Theformerarefeelingtheeffectsofthedebtstructureandpropertylegacyissues,whilethelatterareexperiencingchangesinconsumerpreferences(AtmosphereBarsandClubshavegoneintoadministration).
Themajorcinemachains,ledbyVUE,CineworldandOdeon,continuetoseeknewopportunities,oftenincompetition.Thismightbeseenasanattempttoboosttheirmarketvalue,asmuchasadesiretogroworganically,especiallyinthecaseofOdeon.However,themainthreeplayersareexpectedtoopennewcinemasandover50newscreensinplacessuchasBroughton(Cheshire),CramlingtonandGatesheadinthenortheast,QuaysideGloucesterandNewport(SouthWales).InthecaseofCramlington,theheadlinerentis£15persqftandGatesheadat£14persqft.
Activityinthehealthandfitnesssectorispolarisingtowardsthe“value”sector,drivenbythelikesofPureGym,EasyGymandGymGroup.ThelatterwasrecentlysoldtoPhoenixEquityPartnersforjustunder£100mandexpectstoaddatleastnew20clubstotheirportfolio.FitnessFirst,whichhasrecentlyemergedfromitsCVAprocess,iscommittedtospending£20mCAPEXonrefurbishingtheir85-strongportfolio.
Continuedgrowthisalsobeingseeninthecasualdiningsector.TheRestaurantGroup,havingreportedmoreencouragingsalesgrowthfigures,isontargettoopen35newunitsin2013(including5CoasttoCoast).TGIFridayshavealsorecentlycommittedtotheoldAromaunitinBraintreeat£34persqft.Incontrasttothetraditionalpubestate,
Leisure Market
KnightFrank.com
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thelikesofTobyCarveryandHungryHorsecontinuetoseeknewopportunities(GreeneKinghassuggesteditmaydoubletheHorseestateto400+).Slug&Lettuceisalsolookingforupto40newsites,mainlyinprimeretaillocationssuchasWestfieldandBluewater–inanacknowledgementoftheever-increasingsynergyofleisureandretail.
Investment marketWhilethemostrecentbenchmarkyieldforaprimeleisureassetremainsc.6.20%paidforBurySt.Edmundslatelastyear,marketsentimenthasimprovedin2013.Consumersappeartohaveresistedthetemptationtoreduceleisurespending–albeit“value”isparamount–whichinturnhasledtooccupationaldemandandhigherrentsforthebetterschemes.
MajorinvestorsintheleisuresectorsuchasLandSecuritieshavebeenattractedbythelengthandstabilityofincome(longleases)andrentalgrowthprospects(openmarketandindexation).Earlypurchasessuggestedagreaterdemandforin-townassetswithstrongretailsynergy,suchasCornerhouse(Nottingham)andKingsmead(Bath).However,LandSecurities’purchaseofthemajoritystakeinX-Leisureprovidesexposuretotheout-of-townmarket,aswellasanexperiencedmanagementteamandaccesstokeyoccupiers.Obsolescenceandcompetitionmaybeachallengeforsomeoftheschemes,forexamplePoolewillbethreatenedbynewin-townsupplyinBournemouth.
Wewouldexpectthatthenextdominantprimeleisurescheme(15-yearincome,withindexationandsub-£20m)willtradeat,oraround,6%.Thiswilltakeprimeleisureyieldstowithin75bpsoftheirprimeequivalentintheout-of-townretailsector.
Coffeeshopshaveshownanevengreaterappetiteforretailparks,havingonlystartedtobreakintothismarketin2006/2007.Inthelast10yearsthenumberofCostaandStarbucksunitsopeningonretailparkshasincreasedexponentially,fromoneortwounitsayear,toover20newunitsin2012.TheaveragerentpaidbyCostaandStarbucksacrossasampleof67unitsis£37persqft.
ThefoodandbeverageofferisbecominganessentialpartoftheretailexperienceintheUK.Itisnowwidelyacknowledgedthatanattractiveleisuremixleadstoincreaseddwelltime,aswellasanimprovedconsumerexperience.
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Figure13Growth of Costa and Starbucks on retail parks
Source:TrevorWoodAssociates
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Figure12Growth of casual dining on retail parks
Source:TrevorWoodAssociates
HEADING
Leisure park Purchaser Vendor Price (£m) NIY (%)Odeon,Richmond Available Odeon 9.975 5.75JunctionLeisurePark,Llandudno U/O Prupim 8.25 6.50i-Scene,Ilford U/O Santander 19.50 8.40TheLight,Leeds Legal&General KamesCapital 91.80 n/aCineworld,Cardiff HendersonUKPUT SpectrumAsset 18.96 6.89 ManagementLarksWood,Chingford BAPensionFund Private 6.78 8.25Source:KnightFrank
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