Let's buy a retail park
Understanding the economics of UK retail property
If the growth of the internet and online shopping has been the biggest story of the last 30 years of retailing, the second biggest story has probably been the rise of the edge of town retail park. They have become a regular haunt for many customers and the default property strategy for many types of retailer including, obviously, big ticket and DIY retailers but are increasingly also the first choice for discounters and food and clothing retailers like M&S and Next.
Correspondingly, the development of these edge-of-town car-friendly locations has been blamed for the demise of many a High Street across the UK as consumers have opted for the free parking, ease of loading up big items and larger shop sizes over the traditional town centre retail offering.
I got to thinking about this fascinating change in retailing in the last few decades prompted by this story about the £25m sale of a retail park in Reading.
The subject of that story, Brunel Retail Park, is (to be honest) a pretty run-down affair with at least one empty unit. It is also one of many retail parks in the town (several of which, oddly enough, are for sale) and wouldn’t be any customer’s first pick of them for a rainy Saturday.
So what’s the attraction, then? Why such a high price for what seems very much like a secondary asset? Many regular readers responded really positively to a previous post here at MT where I unravelled the cost of opening and operating a single store:
Let’s do the same, then, with a retail park by putting ourselves in the position of a potential buyer of one of the many parks out there currently for sale. Why are they such an attractive prospect? Here are a few reasons:
There are surprisingly few of them
Just how much retail space is there in the UK? For sizing purposes, remember a typical High Street store might be 1000-3000 sq ft and a bigger retail park store perhaps 8-15k sq ft.
Add it all up, and the astonishing answer is that there are comfortably more than 1 billion (1000m) sq ft of retail space in the UK!
Retail parks, though, represent only about 10% of that space. Sure, 100m sq ft is still quite a lot of stores, but their growth in recent years has been pretty slow - starting from next to nothing in the early 1980s, the heyday of growth for Retail Parks was through the 90s and early 2000s but in the last decade or so growth has slowed dramatically as the well documented problems with the UK planning process have thwarted development.
Fans of High Streets will see that as a good thing, of course, and that may well be true, but it has also meant more and more demand chasing a relatively fixed supply with consequences for the economics of an investment in retail parks which we will explore below.
Tenants really like them
As we explored in the introduction, a retail phenomenon which started with a big focus on DIY ‘sheds’ and homeware retailers has seen a vast array of new types of tenant chasing their space - fashion retailers, grocers, pet retailers, gyms and other leisure brands all joining the queue.
And marry that with the limited supply, of course, and you can see why the result is that vacancy rates are much lower than in the rest of UK retail. One recent report, for example, showed vacancy rates of over 18% for indoor shopping centres and 14% for High Streets but only 5% for Retail Parks.
They are relatively low maintenance
And another comparison with indoor shopping centres that benefits the investor is that they are much easier to maintain, with the annual capital expenditure bill for maintenance reported by one big property investor as being a bit less than half that of covered shopping centres.
That gives the savvy investor lots of opportunity to flex and change their space at relatively low cost, too. One can imagine retail park car parks being retrofitted with EV charging technologies much more quickly and cheaply than other retail sites, for instance.
They work for customers
All of that would mean nothing, of course, if people didn’t want to go to them. But the real driver of all of this energy around retail parks has been that they have, over the last 40 years, increasingly benefited from changes in consumer behaviour.
Consumers are, for instance, more and more likely to have cars and it is convenient to be able to park freely and load your purchases into your boot rather than have to pay to park or struggle onto the bus.
Even the online shopping trend has arguably benefited the retail park since it is easier to for customers to bring returns or to click and collect in the larger stores that occupy them.
The sums
So what does all of that mean for our project to buy a retail park? Well, they are pretty pricy, I’m afraid. The Reading deal we began with represents a purchase price of well over £200 per square foot and that seems to be pretty typical of other deals in the market too. On the other side of Reading the retail centre in Caversham which is, if anything, even more run down is for sale at a price which represents £180/sq ft so there are few bargains to be had.
The reason for that, though, is that you’ll get a pretty good return on that investment. Rental yields of 6.5-7.5% are not uncommon, and with an expectation of capital value growth of 3-5% per year too, the total return on our investment could be north of 10%, which is pretty good for what seems like a fairly low risk investment. And those yields don’t look to be going down any time soon as retailers clamour for space - I know several who would open more stores tomorrow if they could find the right vacancies.
So what?
If you aren’t a potential buyer, though, what is the point of this little jaunt through the economics of a retail park? There are several, potentially contradictory, important points which emerge for all of us interested in retailing:
Retail parks represent a growth opportunity - as a new Government makes clear that it wants to ease planning rules to generate growth, approving more retail parks seems on the face of it to make lots of sense - there is big demand, they aren’t costly or time-consuming to build, there is lots of potential private investment and they will drive consumer spend.
But retail parks are also High Street killers - many examples all around the country will show that if you over-space a town by opening a great big retail park on the edge of town, and then give that park the gift of free parking and easy road links, you will quickly kill off your town centre with potentially disastrous consequences for the economic life of your community.
And retail parks are not good for innovation - the large stores they offer are far too expensive for independent retailers and a very risky proposition for even well funded new retail ventures. If we want our industry to thrive then we need small affordable spaces for innovation to happen, but those need big anchor retailers to ensure customers visit them - another reason for keeping the balance between retail parks, indoor shopping centres and the High Street right.
Whatever happens with future policy changes, though, retail parks are not going away any time soon - and as both retail tenants and customers show, they represent a good investment.