The market has moved 75 bps this year and is holding. The lack of supply of good quality assets, which is likely to continue, and the pent up weight of money on the demand side has led to the re-pricing over the year to date. The hoped for flood of properties has failed to materialise and is unlikely to come forward sufficiently to satisfy the requirements by the year end. Some vendors are giving in to the temptation to over price assets of insufficient quality and these will prove difficult to sell. The demand levels are likely to be maintained in the short to medium term, however it is not price inelastic.

The main level of demand is still for prime, however, this will be in short supply as the tight ownership matrix, whereby the owners are those who wish to buy more, will restrict the release of product until their own buying requirements are satisfied.

The overall transactional volume has risen, with approaching £2 billion traded so far this year (a more than 50% increase on the volume in the first three quarters of last year), but investor requirements still outweigh the supply of stock.

Retail warehousing continues to be one of the better performing segments of the retail market, with an average total return for the 12 months to the end of August 2014 of 14.4%. However, according to IPD rents 
are still falling on an annual basis, though they have flattened over the last three months.

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Of course the investors job is to look beyond current leasing market trends, and it is clear that inward investors to the sector are becoming less risk-averse. We are seeing less caution about historic voids, and fewer concerns about retailer covenant strength. 2014 has also seen an increase in non-domestic investor interest in retail warehousing, as well as a broader rise in interest in forward-funding opportunities.

While many of those who are looking at purchasing UK retail warehouse investments would like to buy prime, we do not expect many such opportunities to come to the market in 2014, and this will put continued downward pressure on prime yields. Those investors who do wish to increase their exposure to retail warehousing will have to become comfortable with assessing the strengths and weaknesses of secondary schemes, and this will become easier as over-renting continues to diminish.

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Strong demand continues to put downward pressure on yields, with schemes like Leamington Spa and Blackwater demonstrating that 4.25% is achievable.

We expect that investor interest in the sector will be sustained for the foreseeable future, though transaction volumes will be broadly similar to the £2 billion that was sold last year. There will be a continued investor bias towards prime, but the lack of options will lead investors to look at assets that are more secondary in their location, tenant profile, planning use, or rental characteristics. We expect over-renting to become less of an issue, though long-term vacancies will still cause investors to pause.

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Taken from
Spotlight: UK Retail Warehouse Market - September 2014