Yield compression through to 2021

Savills IM sees yeild compression in the UK retail warehouse sector through to 2021 

• Supply and demand factors support the sector
• Dominant retail parks positioned to service the ‘click & collect’ economy will have an advantage

The UK’s prime retail warehouse sector should see yield compression over the next five years, helping to insulate investors from any Brexit fallout, according to analysis¹ by Savills Investment Management (“Savills IM”), the international real estate investment manager.

Demand and supply factors support the sector and should Brexit impact further upon consumer confidence, the presence of value retailers offers retail warehouses insulation against this. Additionally, the presence of household goods stores, which act as click and collect outlets as well as showrooms, thereby protect against the increase in online retailing, Savills IM says.

The analysis¹ predicts prime yields in the sector will fall from 4.83% in 2016 to 4.34% by 2021. Prime capital values are predicted to rise by 17% over the same period.¹

Savills IM believes there are now investment opportunities to be found in dominant retail parks in the UK with good footfall, low rents and good quality, value-oriented retailing tenants,. Micro locations that meet such criteria are available across much of the UK.

The vacancy rate in the retail warehouse sector is now 5.9%, which is the lowest since 2002 and down from 10% in 2013². Furthermore, the lack of supply of new units is likely to support the sector further should there be any reduction in the UK consumer demand following Brexit.

¹Source: Savills IM analysis of PMA data

²Source: Trevor Wood Associates

³Source: BPF

Kiran Patel, Chief Investment Officer at Savills IM, commented:

“We can expect to see a sustained period of upward pressure on returns in the UK retail warehouse sector and reduced rent-free periods.

 

“Retail parks and other ‘big box’ outlets could indeed benefit from their accessibility, convenience, free parking and low occupancy costs, not only as points of sale but also as places to showroom brands, engage with customers and offer ‘click & collect’ facilities, particularly those parks with household goods such as furniture, DIY and electricals, and food/supermarket products.

 

“The underlying environment of well-capitalised lending, low leverage, low gilt yields and good liquidity supports the retail warehouse sector. Combined with a fall in sterling, this makes the sector attractive, especially for international investors now that sterling has fallen so extensively and as the retail warehouse market matures.”

 

The UK retail warehouse market is worth around £52 billion, accounting for 7% of all UK commercial real estate assets.³