Investor sentiment towards retail property remained largely positive in the first half of 2023 despite economic challenges, according to data from Knight Frank, with investment reaching £2.89 billion thanks to increasing demand for foodstores and strong appetite for prime retail warehousing.
Foodstore transactions totalled £1.07 billion in the first half, buoyed by two trades of a Sainsbury’s portfolio, with activity predicted to be sustained in the remaining six months of the year by major sale and leaseback programmes by Morrisons and Asda under new ownership.
Knight Frank data showed a potential return of rental growth in the foodstore sector, with supermarket tenants committing to higher rents on new build-to-suit facilities to support development viability.
It also revealed robust demand for retail warehousing, with evidence of re-based rents, reduced rates liability and low void rates attracting the attention of UK institutions, which accounted for 52% of the £995 million transacted in the period.
The agency predicted "strong fundamentals would underpin investment activity" in the second half of the year, with retail warehousing delivering a total return of 4.9% from January to May, according to MSCI, making it the "best performing real estate asset class".
It found a total of £467 million was invested in shopping centres during the first half of the year, with Frasers' £58 million acquisition of The Mall in Luton evidence of a "rebound in bigger-ticket transactions" and emergence of some retail occupier groups as buyers.
It added debt availability "remains limited" and that activity in the second half is likely to be "driven by buyers with larger cash reserves". A further £352 million was invested in high street retail in the first quarter as UK and overseas buyers capitalised on counter-cyclical buying opportunities and attractive yields.
Knight Frank partner Will Lund, who works in the agency's retail capital markets, said: "Despite the macro-economic challenges consumer spending is holding up pretty well which is underpinning largely positive investor sentiment towards retail property.
"Activity in the first half has been driven by a surge in demand for foodstores, with supermarkets proving resilient to the cost of living crisis and an increase in portfolio and sale & leaseback activity.
"There is also continued strong appetite for retail warehousing which is proving to be resilient in the face of wider economic challenges."
Sam Waterworth, a Knight Frank partner also working in the retail capital markets team, adeded: "Retail has been rebased over the past five years and is now priced attractively relative to other real estate sectors, with yields in some cases that match inflation.
"We are seeing an increasingly wide range of buyers including retailers, local authorities, and private equity groups, looking at counter-cyclical buying opportunities for shopping centres and high street lots where the right asset in the right location can be evolved to accommodate a new mix of retail, leisure and F&B occupiers."