With inflation easing, consumer confidence building and Christmas approaching, the UK real estate sector is getting more excited, and about retail parks in particular. Many real estate investment trusts (Reits), private equity firms and institutional investors think these assets – which tend to be on the outskirts of towns and cities and typically comprise a car park surrounded by large, cavernous shops, hence the alternative moniker ‘retail warehousing’ – are a bargain right now, with the likes of British Land (BLND), Landsec (LAND) and NewRiver (NRR) all singing the praises of the asset class in interim results posted last month.
Indeed, in September, British Land held its investor day not in a shiny London office building but at Nugent Shopping Park in Orpington, touting itself as “the UK’s largest owner and operator of retail parks with 8 per cent of the market”.
Their logic is easy enough to follow. The rise of online shopping has emptied British high streets and shopping centres over the past decade, and their collapse in value has brought down the value of retail parks with them. Those bullish on retail parks see this downgrade as unjustified and therefore spy an opportunity to buy them at a cut price, their confidence driven by rising occupancy and rents.
How retail parks are bucking the trend
Retail park resilience is surprising because many are decades old. 1980s shopping centres and 1990s high streets look and feel dated. Shoppers’ spending habits have changed in multiple ways since then, largely thanks to the internet, yet 1980s, 1990s and 2000s retail parks still bring in the cash.
There are two main reasons why retail parks thrive in a future their designers never imagined. First, they are ideal for several kinds of shopping. Physical shoppers can shop in person, click-and-collect shoppers can take advantage of their ample car parking, and even fully online shoppers' orders are sometimes fulfilled from retail parks due to their proximity to main roads. The interest in this third type of consumer is why some warehouse developers – such as Segro (SGRO), Prologis (US:PLD), and private equity players – have bought retail parks. They do this to turn the sites into warehouses for online shopping orders when the leases run out.
Second, retail parks are cheap – for everyone. They’re cheap for institutional buyers and Reits because of low valuations. They’re cheap for retailers due to low rents and business rates, which are partly the result of lower valuations but in part because, whereas high streets and shopping centres were once considered luxury destinations (and some still are), retail parks have always been discount shopping locations. All this makes them cheap for shoppers, too, with tenants such as B&M Bargains and Next Outlet often found in situ. And the appeal of discount shopping has only risen as the cost of living has increased.
There was another, temporary reason for the parks' recent success. As mostly outdoor spaces that are within walking distance of many suburbs and with ample parking for those wanting to drive and avoid public transport, retail parks stayed open and traded well during the pandemic. Once again, the omnichannel offer helped as lockdowns turbocharged online shopping. Shopping parks also became an unexpectedly popular leisure activity when Covid-19 restrictions meant clubs, pubs, bars and restaurants were off-limits. Suddenly, visits to Ikea passed as 'fun'.
The latter attitude may have faded away, but management teams believe shoppers' general habits are here to stay.
“We are sometimes asked whether the footfall and sales outperformance of retail parks is just a Covid bounce because they are open air and were perceived to be safer to visit,” said British Land chief executive Simon Carter in its results earlier this month. “We believe it is instead a permanent structural shift driven by the three “A’s”: affordability, accessibility and adaptability.”
British Land has been putting its money where its mouth is in this respect. Since 2021, the company has bought £410mn of retail parks, meaning they now account for £2.1bn of the Reit’s £8.7bn portfolio. At the same time, it has been selling “mature” assets such as London office buildings and shopping centres. Interim results suggest this tactic is paying off, at least in the short term. Retail parks recorded higher estimated rental value (ERV) growth than any of its other asset classes over the six-month period and, along with London warehouses, were the only asset classes to increase in capital value.
The story was similar for NewRiver (NRR). In its own interim results, also posted last month, its retail parks’ rents and value rose while the assets it plans to sell – mostly shopping centres – posted drops in both rent and value. Chief executive Allan Lockhart told Investors’ Chronicle that retail parks are the “favoured sector” on its buying wishlist this Christmas and beyond.
However, a market of retail park buyers means a market of sellers, and some of those sellers are inevitably not as enthusiastic about the asset class. Retail parks used to account for most of LondonMetric’s (LMP) portfolio, but the Reit has sold most of them to transition towards warehouses and other sorts of long-leased assets instead. Chief executive Andrew Jones believes some of the fervour surrounding the segment is overdone.
“In a previous life, I assembled the biggest portfolio of retail parks in the UK – probably around £4.5bn,” he said. “It’s a market I know well, and [LondonMetric] has some. And there are opportunities. But you’re not going to get a 20 per cent return on rental reviews on retail parks, whereas you can in warehouses.”
Retail parks have another potential problem. Shopping habits have changed many times in the past decade, so it is not impossible to imagine another change drawing consumers away from the asset class as quickly as it drew them towards it. If so, that might ultimately mean buyer's remorse for those who have invested so heavily. As it stands, they are backing their bets to keep paying off.
