While it might be too early to call the beginning of a new space race, it is clear the structure and volume of retailer demand is quietly turning.

Retailers are now looking beyond the prime towns, with rising demand for units in the secondary towns where rents have stopped falling, and tertiary towns where the bottom of the cycle is coming into sight. Retailer demand for these 'bread and butter towns' is to a large part being driven by value retailers and discounters, with retailers like Peacocks aspiring to increase their portfolios significantly. This change of tone is best demonstrated by the strong demand from a wide variety of retailers for stores within the Phones 4U portfolio.

In the food retail sector, while the recent news flow has generally been very negative, we are seeing an increasing recognition that it would be a mistake to rush into downsizing when there are cyclical factors at play. Both the economy and population are forecast to grow over the next five years, and all these people will need somewhere to buy their food, even if the traditional large weekly shop model is changing towards an increasing number of smaller shops at local convenience stores.

We are seeing this spread of confidence from prime to secondary locations in many markets including London, with Toy Store setting a new rental high of £925 Zone A on Oxford Street.

There are still challenges ahead for retailers and landlords, but by the end of 2015 we expect to be past the peak of lease expiries in the high street retail sector. At that stage there will be a much clearer picture of where retailers want to be and where they can trade well from whatever price point that they operate in. This will coincide with a sharp overall fall in UK vacancies, the end of turnover only rents in tertiary towns and pitches, and the return of actual rental growth in secondary markets.

Over the next five years we expect average annual retail rental growth to be 2.5% per annum, but this hides a wide divergence between some London locations that are expected to grow at 4.5% to 5.5% pa, and the rest of the country at around 2.0% per annum. However, the major change in our rental outlook over the last 12 months has been in the number of towns where we are forecasting negative average annual rental growth over the next five years. This has changed from more than 30 towns to less than five, as the aforementioned secondary market recovery, and tertiary market flattening has begun.

Taken from
UK Shopping Centre and High Street Bulletin Q3 2014