The South East of the UK, with its affluent consumers and housing market recovery, remains high on most retailers lists of markets in which they would like more stores.
A great recent example of the rising strength of retailer demand for units in the South East is the out turn of the recent administration of Paul Simon. The bulk of this home furnishing retailer's stores were in the south of England. Over a dozen have been acquired by retailers direct from the administrators and we understand that a number of other units are in the process of being re-let, some of which will be at higher rents than Paul Simon were paying.
Retailers upsizing
The key trend of note in occupier requirements across the South East is a rise in the size of requirements. Retailers across most sectors are looking to the retail warehouse market as an opportunity to offer their full product range in store, something that they would not be able to do economically in a high street shop. Typical of this trend is Next's new format which has two mezzanines. We believe that this trend is being driven by the recognition that the internet-savvy consumer is increasingly demanding that their trip to a real store should mirror the range of SSUs that are available on the company's website. As such, we expect to see the trend to larger stores spreading across all segments of the markets, and all economically viable geographic locations.
The housing market recovery is stimulating expansion in the bulky goods sector. Indeed, for the first time in a considerable period the bulky goods sector is far more acquisitive than the fashion sector. Active retailers in this segment include Dunelm, Harveys, Oak Furnitureland, Wren Living, Betta Living, Sofaworks, DFS as well as the re-emergence of retailers such as ScS.
Again, most of these retailers are looking for larger stores than they have been in recent years, with the typical requirement now increasing from 7,500 - 10,000 sq ft back to 10,000 - 20,000 sq ft, so back to the size requirement of the late 90’s/early 2000’s. A good example of this trend would be Wren Kitchens whose typical requirement used to be around 10,000 sq ft. Their new requirements, under the Wren Living brand, are for 15,000 - 20,000 sq ft.
The demand from furniture retailers has also been swelled by several new entrants. These include both Furniture Barn and County Furniture Stores. We expect other new entrants to emerge and some of these will no doubt emanate from the internet, following the success of both Oak Furnitureland and Wren Living.
While the first generation DIY retailers are generally still in rationalisation mode, the newer entrants such as Screwfix, Wickes and Travis Perkins are all currently acquisitive. We expect that demand from this sector will increase across the South and the rest of UK as the recovery continues.
The smaller food retailers continue to be active across the South East, with M&S Simply Food, Aldi and Lidl all competing for 10,000 - 15,000 sq ft stores. In the case of both Aldi and Lidl they are both now considering retail parks, having previously preferred standalone freeholds. Clearly this is owing to the scarcity of finding suitable sites and the speed for which these occupiers want to expand, having attracted so many new customers from the so called big four. With their current momentum, the opportunity to expand quickly is best served through acquisitions on existing retail parks.
The last few years the discount sector has attracted much of the press, through the phenomenal growth of these retailers. The recession tightened household budgets, which forced consumers to look further afield for value. In much of the south east, the recession is turning into a distant memory but the affluent consumer is not shunning these retailers. In fact, the likes of B&M, Home Bargains and Poundstretcher are particularly focused on this corner of the country.
Supply and Demand
The level of availability has continued to fall, with the national vacancy rate in the latest research from Trevor Wood Associates now at 8.8%. The vacancy rate in the South East is even lower, and has fallen from 8.8% at the end of 2012 to 7.1% at the end of 2013. We do not expect this increasing undersupply to be alleviated by development starts, though we are aware of several projects in the South East where new retail warehouse development is being jump-started as part of a residential-led schemes.
Rising demand and tight supply in the South East is beginning to put some upward pressure on net effective and headline rents in prime locations. Indeed, in some locations recent lettings have rebased headline rents to above their 2007 peak. Tier 2 towns and schemes with historic voids are still experiencing falling rents, but at a slower rate.
We expect to see more landlords willing to do deals at lower rents in these locations, with the rationale for this being to fill voids and eliminate the risk of their scheme transitioning from secondary to tertiary. Their ultimate expectation will be to achieve rental uplifts at the first review, and this fits in with our current forecast of accelerating rental growth in the sector from 2016-17.
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