■ Last month's Market in Minutes focussed on the opportunities in the central London retail market, but 
we believe that other parts of the 
retail sector are worth examining 
more closely.

■ The first reason for looking at retail property is slightly contra-cyclical. Many investors are still cautious about the prospects for retailing in the UK due to the impact of internet retailing and the consumer recession. However, we think that there has been too much pessimism about the structural change that is e-tail, and not enough weight put on the inevitable cyclical recovery that will follow the steady improvement in consumer confidence that has been seen over the last nine months.

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■ Retailer demand is now spreading from the prime towns and pitches down to the secondary markets where rents have rebased enough to make new store openings viable. While there are still a significant number of lease events due to take place next year, we expect that 2015 will be the nadir of this aspect of the retail cycle.

■ The second reason to look at retail property is that it is one of the few sectors that offer larger lot sizes outside London. Anecdotal comments from many domestic and international institutional investors are pointing towards a desire to invest in the UK regions, but this is being foiled by a severe shortage of office investments of £50 million and above coming to the market. The average lot size of shopping centre transactions this year has been £94.7 million, with more than 80 centres sold in the first nine months of the year.

■ The final reason for re-examining the joys of retail property is the risk profile. While many investors still perceive retail as being relatively high risk due to the aforementioned cyclical and structural changes that are taking place, the sector offers similar or better income security to both office and industrial investments.

■ For example, supermarkets, standard shops, shopping centres and retail warehouses all offer a comparable or better WAULT than the other commercial sectors, and a lower void as a percentage of the overall ERV. Furthermore, while the travails of Tesco have dominated the headlines in recent weeks, the covenant strength of many retailers is strong, particularly since in segments like bulky goods and electricals many retailers now have significant market share due to the failure of their competitors during the downturn.

■ While it would be nice to say that we have spotted these trends before the rest of the market, it is clear from the recent levels of investment into retail warehousing and shopping centres that the attractions of retail are rising in investor's minds. Indeed, as Graph 3 shows, the investment turnover in these two segments in the first three quarters of 2014 has exceeded the full year 2013 total, and is likely to reach pre-boom levels by the end of this year. We expect that this strong level of interest in the sector will continue into 2015.

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Taken from
Market in Minutes: UK Commercial November 2014