Central London: a work-in-progress recovery

Written By:

Stephen Springham, Knight Frank

19 May 2023

9 minutes to read

Categories: Property Sector Retail World Regions UK London

Key Messages

• Overdue Signs of recovery in the Central London retail market
• Retail spend in West End tracking higher than footfall levels
• Spend levels +4% higher in Q1 than pre-pandemic (Q1 2019)
• Despite footfall being -27% lower than Q1 2019
• International visits have recovered much quicker than anticipated
• Rebound particularly from visitors from US (+48% vs 2019)
• Volume of international tourists set to fully recover by Summer 2023
• Signs of life in the occupational market
• Vacancy rates on Oxford Street recede to 16%
• West End rents grow +0.4% in Q1
• Yields stable (Bond Street 2.75%, Oxford Street 4.25%)
• Redevelopment of Oxford Street still very much a work-in-progress
• Fragmented ownership a key challenge.

“In this world nothing can be said to be certain, except death and taxes. And retail rental growth in Central London”. An admittedly doctored version of an age-old idiom that historically always rang true but has been seriously derailed in recent years.

Take the Global Financial Crisis by way of historic example. While economies the world over went into meltdown and the UK retail market generally saw massive shake-up and fall-out, the West End simply carried on regardless, achieving record rental tones almost for fun. Prime zone As on Oxford Street were ca. £575/sq ft coming into the GFC and ca. £800/sq ft coming out.

Of course, we now know that many of these ‘record’ rents were unsustainable and in recent years, the unthinkable has happened – West End retail rents have rebased. And some. Like so many things, the blame for this has been laid squarely at the door of COVID when the reality was that this was already in motion before the pandemic set in. Prime zone As on Oxford Street were ca. £850/sq ft coming into COVID and ca. £625/sq ft coming out.

Prime zone A rents have become a limited currency over time and these days are but a headline barometer at best. What is actually happening on the ground is far more fundamental – and taking things at face value, perhaps even uglier than the zone A rent movements suggest. To call a spade a spade, Oxford Street doesn’t currently present well, if we’re being kind. If we’re not, it’s a complete mess, unless you’re a fan of building sites and tacky American candy stores.

The media have certainly latched onto this and some have questioned whether Regent Street has usurped Oxford Street as the premier retail thoroughfare in the capital. Cue widespread heated debate across the property industry (OK, only gentle and across only some parts) and even a frenzied spat on social media (less Vardy vs Rooney on Twitter, more middle-aged agent vs other middle-aged agent on LinkedIn).

The West End: terminal decline or mere transition?

Tourists remain the lifeblood of the West End

While the West End rode out previous recessions and crises virtually unscathed, it has undoubtedly been harder hit by the COVID pandemic than the rest of the UK retail market. More profoundly impacted and far slower to recover.

While the dynamics of WFH / hybrid working has tended to dominate any narrative around the health of the capital, for the West End retail market, this is something of a secondary consideration. Tourists (domestic and international) rather than workers remain the single most important driver of trade. Figures from CACI and the New West End Company suggest that in a typical year, tourists account for ca. 45%-50% of retail spend in Central London. In very simple terms, when tourists weren’t here during the pandemic, nor was their spend.

The messages on the tourist front are encouraging: international visits to the capital have rebounded much quicker than anticipated, such that the volume of international visitors is set to fully recover this Summer (in July to be precise, based on hotel occupancy forecasts). A key driver behind this has been a significant rebound in inbound visitors from the US in particular. In March, international flight bookings from the US increased by +141% vs 2022 (+48% vs 2019) and in the first quarter of the year, US visitors accounted for up to 17% of international spend. In contrast, bookings from China remain below pre-pandemic levels, but are building considerably as travel restrictions continue to ease.

Very mixed messages on footfall and spend, the latter far more positive (and meaningful) than the former. The high update frequency and oft-cited footfall figures paint a more muted picture. With considerable daily/weekly ebbs and flows, footfall in the West End for Q1 as a whole was still down -27% on pre-pandemic levels. But this detracted from a major inflection point in Q1, namely that actual spend levels finally surpassed pre-pandemic levels. For Q1 as a whole, spend increased +4% vs. the equivalent period in 2019.

Footfall down (-27%) yet spend up (+4%) obviously points to higher ATVs (average transaction values). A familiar retail de-coupling which once again brings into question the curious notion that footfall is a water-tight barometer of retail health. 

A turning point in occupational demand?

Some signs of life too in the occupational market. In general, occupiers are showing cautious optimism for the year ahead. 71% of luxury London brands say they feel optimistic about business prospects over the next year, versus 11% who are uncertain. Upsizing and relocation to better units / pitches was a key theme in Q1, with new spaces established on 114 - 116 Kings Road (Rixo), 30 James St (Bloobloom) and 107 New Bond St (Diptyque). 

On Oxford Street itself key lettings included 5,189 sq ft in Hines’ Oxbourne House (354 Oxford Street) to Manière De Voir, a Manchester-based online fashion brand. And, more excitingly to those of us of a certain vintage, news that HMV is to return to its fabled store at 363 Oxford Street (at the expense of one of the aforementioned American candy stores). How many stores can lay claim to have played a pivotal role in the history of The Beatles?

Slightly more soberingly, the MEES regulations became effective from April 1. Some 5% of UK retail units have EPC ratings of F or G and this includes a number of key stores in the West End. The result is a portion of sub-quality stock which will have to be dealt with swiftly by landlords to be successfully relet. However, the strength of occupier demand in the capital is currently serving as a solid enough incentive to upgrade stock to match new market expectations.

A more active occupational market is manifesting itself in both receding vacancy rates and positive rental growth. According to LDC data, the vacancy rate on Oxford Street at the end of Q1 2023 was 16% - still way higher than historic levels (<5%), but at least trending in the right direction. For what they are worth, prime zone A rental declines appear to have bottomed out (Oxford Street stable at ca. £650/sq ft). According to MSCI, underlying rents in the West End are now again in positive growth territory, increasing +0.4% in Q1.

Oxford Street – still a work in progress

This positive undercurrent may not be wholly-apparent on a cursory wander down Oxford Street. Much of it is still a building site and the proliferation of American candy stores is hard to ignore. Legal implications prevent me from saying what I think the latter actually are, but suffice is to say, their leases are likely to be short and when the market recovers, landlords will be turning to ‘less temporary’ operators.

The impact of the Elizabeth Line has been curiously overlooked. For years, the advent of Crossrail was hailed as the saviour of the West End, yet since its opening, it is barely referenced. And when it is, it tends to be in the context of passenger numbers (c.f. my earlier comments re. footfall).

The real positive impact of the Elizabeth Line is the fact that it has prompted major re-development of large blocks, not just around the station hubs but the length of Oxford Street itself. For all its supposed pre-eminence as a retail destination, much of the retail stock on Oxford Street isn’t fit-for-purpose in terms of age, size and configuration. The re-development process is (slowly) creating units much more in keeping with modern-day retailing requirements. The re-purposings of Debenhams and House of Fraser on the western end of Oxford Street are further blots on the landscape currently, but work continues apace. 

Oxford Street isn’t the finished article by any means currently. But watch this space – and maybe come back in a couple of years to fully appreciate the level of change. 

Oxford Street vs Regent Street

Never one to avoid a retail debate, what of the Oxford Street vs Regent Street argument? Rental tones (again, for what they are worth) would seem to suggest that Oxford Street is still slightly more desirable than Regent Street, but the gap has narrowed massively over the years. Historically, Oxford Street has always commanded a ca. £150 - £250/sq ft prime rental premium over Regent Street, but since 2020, this has reduced to just £25/sq ft.

Be that as it may, there are two fundamental but seismic differences between the two thoroughfares – architecture and ownership. From conception, Regent Street was carefully planned and meticulously designed by John Nash. Oxford Street never enjoyed such a privilege. Regent Street has always outscored Oxford Street on aesthetics and in all likelihood, always will. In very base terms, Regent Street has always been ‘nicer’ than Oxford Street.

To the second difference, ownership of Regent Street is highly concentrated, The Crown Estate and the Norwegian sovereign wealth fund Norges the two major landlords. In contrast, the ownership structure of Oxford Street is highly fragmented – although certain blocks may be under common ownership, I would conservatively guess that Oxford Street has more than 100 disparate landlords, perhaps more than that?

Concentrated ownership is largely a much more effective vehicle for managing change and establishing consistency of standards. A landlord can only control what is under their ownership – the more they own, the more control they have. On Oxford Street, 100+ landlords will have their own agendas and it is far harder to achieve strategic consensus and joined-up thinking (although the New West End Company BID strives admirably for this purpose).

Rather than championing Regent Street wholesale, it’s worth remembering that it too has had considerable ups and downs in the past - it has required significant investment and asset management on the part of The Crown / Norges to get it to where it is today. You could (and I would) argue that Regent Street is at the end of its investment journey, Oxford Street is just further back on the same journey – which will be more challenging because of the ownership issues highlighted and longer, simply because it is bigger than Regent Street.

‘Oxford Street vs Regent Street’ isn’t a binary debate – it is possible to like both. Just as it is possible to love The Beatles and The Stones. The key difference – for the moment at least – is that Regent Street is largely the finished article, Oxford Street is a messy work in progress. Rome wasn’t built in a day. Nor was Oxford Street.