Retail parks have become the ‘darling’ of the retail sector in recent years as investors flock to buy assets amid constrained supply, tempted by strong yields and accessibility.

Market leader: British Land bought St David’s Retail Park in Bangor earlier this year as part of a portfolio acquired from M7 Real Estate for more than £45m

The year began slowly for the market, with just £407.5m of investment in Q1, according to research by CBRE. The sluggish start reflects a hangover from 2023, when elevated debt costs and a mismatch in pricing expectations meant just £1.96bn was transacted across the year – 32% below the previous year.

However, the market is heating up. Market leader British Land has deployed more than £770m on three separate portfolio acquisitions since April. The latest came last week, when the group announced the completion of a £441m deal to buy seven retail parks from Canadian investment firm Brookfield in a major bet on the asset class.

British Land is not alone in the rush to buy. Big-name players such as abrdn, CBRE IM, Columbia Threadneedle, M Core’s Evolve Estates and Warehouse REIT have all been active in the market in recent months as consumer confidence and the macroeconomic backdrop continue to improve.

So with retail parks proving hot right now, where is the sector headed next?

“I think it’s fair to say that competition for retail parks is very high right now,” says Pierre Kunkler, director, retail capital markets, at Colliers. “Stock is tight. The top 30 or so parks in the country are owned by the top four or five players, and they are all keen to grow their estates rather than downsize them. We also have new entrants pushing in.”

It’s fair to say competition for retail parks is very high right now
Pierre Kunkler, Colliers

Supply is particularly constrained by high build costs and planning policy that leans towards protecting high streets over allowing out-of-town development. As a result, buyers are going head-to-head over available assets.

Matt Reed, head of asset management for retail parks at British Land, says investors keen to enter the market or increase their presence have been waiting for interest rates to come down, leading to a flurry of activity in recent months.

“The attractive fundamentals we have been talking about for a number of years are only getting stronger,” he said. “Those who have to raise debt now have an easier route in. Many have been building up their war chests and some are now more able to deploy than perhaps they were six months ago.”

Sought-after asset class

The flurry of activity does not show any sign of stopping. Reed says retail parks are a “darling in the market” and assets are more highly sought-after than most across the real estate spectrum. “You are starting to see an improvement in ERV [estimated rental value] growth in terms of property returns; while from a total returns perspective, it’s been the best-performing sector for a while now,” he says.

“You can buy good-quality retail parks at between a 6% and 7.5% yield, which compared to other sectors is very attractive.”

The attractiveness of retail parks for investors is in part fuelled by their attractiveness for occupiers. The sector’s vacancy rate has narrowed in the past year and the tight supply-and-demand dynamics meant prime rents rose 5.3% in the first quarter of the year.

Out of town: Columbia Threadneedle bought Merry Hill Retail Park in the West Midlands for an undisclosed sum in May

But despite rising rents, retail parks are still considered good value for occupiers. “The sector was previously affected by perceived higher rents, but this was instantly corrected during the pandemic as landlords agreed rent reductions and lease extensions on their parks,” says Andrew Hulme, executive director, retail investment at CBRE.

“These regeared leases were predominantly for five years, meaning that many are close to expiry in 2025 or 2026, allowing landlords to factor in rental growth into their appraisals, as well as buyers. This, combined with record low levels of voids, has created the perfect market conditions to attract investors.”

Nick Turk, director, out-of-town retail, at Colliers, says occupier interest in taking up leases at Carpetright’s 218 UK stores, following the company’s administration in July, has turned what could have been a downbeat story for the sector into one that demonstrates growing confidence.

“Following the administration, I would say approximately 80% to 90% of those properties have got tenants sorted or deals being lined up,” he says. “Carpetright has shown there is pent-up latent demand for retail parks.”

Value for money

With high footfall and the space and flexibility to deliver a range of services, retail parks are viewed by occupiers as good value for money. This could mean more retailers switch from high streets, says Turk.

“All the big DIY occupiers use their retail park units as hubs for click and collect for delivery, which obviously high-street locations can’t achieve,” Turk adds. “Covid accelerated the popularity of retail parks. They were seen as safe, clean environments to shop in. Those habits have continued now and, as a result, you have quite a few high-street occupiers that are looking to take retail park units that offer better range of use.”

British Land’s acquisition of the Brookfield portfolio has cemented its position as sector leader. In April, the group owned 8% of the UK retail park market by square foot and it has since added almost 3m sq ft of space to its portfolio. Reflecting a major shift in strategy, retail parks now comprise 32% of the firm’s portfolio – up from 22% 18 months ago.

“These parks offer a healthy income return, with a yield of around 7.2% from the outset,” says Oli Creasey, property analyst at Quilter Cheviot.

He adds: “The retail park sector is currently very hot, with British Land’s existing retail parks increasing in value by 5% over the past six months, outperforming the retail park index. This suggests that British Land owns some high-quality assets. Adding to this portfolio appears to be a smart move, as it is buying into a sector with momentum.

“The parks are currently ‘over-rented’, meaning that if rents reverted to market prices tomorrow, they would decrease by about 5%. However, with expected rental growth, this issue should resolve itself by the time most leases are up for renewal.”

Reed says British Land wants to continue to deploy capital on parks. “We really like the retail park sector,” he says. “If the right opportunities exist in the right places and for the right price, we will continue to add to our portfolio.” Others are likely to follow suit.