For the final Retail Note of 2024, we showcase Knight Frank’s hot-off-the-press Retail Investment Update & 2025 Outlook. What we’ve seen in 2024 and what we may expect from next year.

Key Messages

• Retail on course to be the top performing property asset class in 2024

• Retail to achieve total returns of 8.2% in 2024…

• …and forecast to achieve total returns of 8.9% in 2025

• A combination of income return (5.9%) and capital growth (2.9%)

• Spearheaded by retail warehousing (2024: 12.4%, 2025: 11.4%)

• Retail rental growth of 1.2% in 2025

• All retail sub-sectors to see a degree of positive rental growth

• Retailer distress in 2024 less than half the pre-pandemic average

• Only 886 physical stores have been embroiled in CVA/administration activity

• Two thirds of the Top 300 retailers are rated “low risk” by KF

• Retail investment volumes of £6.18 billion in 2024

• Slightly below 10 year averages (£6.87 billion)

• Retail warehousing the hottest investment class

• Retail warehousing investment volumes of £2.4bn in 2024

• Shopping centre investment volumes of £2.17 billion

• Some way below historic peaks of ca. £3 - £5 billion

• Average lot sizes increase

• Driven by part-owners upsizing in their existing investments

• Investor sentiment towards retail at a 10 year high.

Better than last year, but not perfect by any means. 2024 in a nutshell. And despite the new government’s best efforts to the contrary, 2025 should prove better still for the retail market.

The best performing mainstream property asset class in 2024. Hold that thought. It’s certainly been a long time since retail has held that accolade. But, with no small help from the retail warehousing market, that is the reality for this year – and, in all probability, next year too.

Do retail property investment volumes fully reflect this? Sadly, not as yet. The investment annus horribilis of 2023 set a low bar of comparison and despite an improving trend throughout 2024, retail investment volumes are still not at the level we would like them to be. But with a stabilised occupier market, renewed rental growth prospects and an improving (but still challenging) macro-economic backcloth, hope springs eternal for the coming year.

General outlook

2025 Macro-economics - counting the cost of clarity and certainty

A more stable geopolitical backcloth with less uncertainty – but tightening fiscal policy, decelerating economic growth and retail at the sharpest end of tax hikes.

Slowing economic growth in H2 2024 is likely to restrict GDP growth to +1.5% in 2025 (vs. +1.0% in 2024). The positive reduction in RPI inflation witnessed throughout 2024 will bottom out and many of the new government’s fiscal policies may prove inflationary. CPI is forecast to increase to 2.5% by 2025 year-end (vs. 2.3% at 2024 year-end).

Sticky inflation will not necessarily stand in the way of further interest rate cuts. A staggered round of reductions is likely to see 100bps of cuts in 2025, leaving the year-end rate at 3.75% (vs. 4.75% at the end of 2024). The longer-term forecast is 2.00% by the end of 2027. Faster rate cuts are possible if government fiscal policy dampens wider economic growth.

Macro- and retail economies will be maintained by tight employment markets – the unemployment rate is forecast to remain stable at just 4.3% in 2025 and average earnings growth of +3.4% will be higher than inflation. However, consumer markets will remain fragile, with private consumption forecast to grow by just +1.9% in 2025.

After a period of heavy inflation and consumer squeeze, retail sales are likely to remain fairly subdued. Retail sales value growth is forecast to be decelerate to +2.5% in 2025, below both long term (30 year) and 10 year averages of +3.5%. Retail sales volume growth is likely to be in the same order (+2.5%), with grocery inflation offsetting marginal deflation in non-food.

2025 Property Prospects – retail comfortable wearing the crown

Spearheaded by retail warehousing, retail to retain its crown as the top performing commercial real estate asset class. Positive metrics across all retail sub-classes.

All Retail forecast to achieve total returns of 8.9% in 2025 (vs 8.4% for All Property), further improvement on the 2024 outturn of 8.2% (vs 5.1% for All Property). Retail warehousing to again achieve double-digit total returns (11.4%) and maintain its status as the top performing commercial asset class. But decent total returns also in standard shops (7.6%), shopping centres (8.6%) and foodstores (8.4%).

Tellingly, this improvement in total returns will be driven not just by high income return (+5.8%) as was the case in the past, but also by positive capital growth (+2.9%). Capital value growth will be strongest in retail warehouses (+4.5%), but will not be insignificant in shopping centres (+1.7%) and standard shops (+2.9%) – in the latter case, the first year of positive growth since 2017.

A clean sweep of rental growth – All Retail is forecast to achieve rental growth of +1.2% in 2025. Although still fairly modest, this is significant in that all retail sub-sectors are forecast to achieve positive rental growth to some degree, a feat achieved only once since 2007 (in 2014). Within retail, Central London shops (+2.3%) and out-of-town shopping centres (i.e. regional malls) (+2.2%) are forecast to register the strongest rental growth in 2025.

Longer Term Prospects – shaken by Autumn Budget pressures, but not stirred

Measures and tax hikes announced in the 2024 Autumn Budget deeply unhelpful for retail, but are only likely to stymie rather than destabilise long-term growth.

A triple whammy of 1. employer NI contribution rises 2. increases to national minimum wage and 3. “new” business rates multipliers has added considerable cost pressures to retail occupiers, which are likely to moderate demand and rental growth in the short term. But once understood and absorbed appropriately, the sustained retail recovery will continue longer term.

Retail’s annual average total returns between 2024 and 2028 are forecast to be 8.1%, with 5 year annual average capital increases of +2.2%. Retail’s annual total returns over this five year period will be higher than Office’s (6.0%) and only marginally lower than Industrial’s (8.2%).

Although positive, underlying rental growth will remain modest (+1.5% p.a. 2024 – 2028). Central London retail will be the main positive outlier to this (+2.5% p.a.), with retail warehousing (+1.9% p.a.) and regional shopping centres (+1.9% p.a.) also outperforming the wider retail market.

Retail’s status as the highest income return commercial asset class remains undiminished - annual average income returns between 2024 and 2028 are forecast to be 5.8%, higher than offices (5.3%) and industrial (4.6%).

Occupational markets

Not as bad as we feared it might be. On balance, still challenging. But compared to the turbulence of recent years, the occupier market has shown resilience and, dare we say, a measure of renewed stability.

Retailer distress is at historic lows, vacancy rates are broadly stable, and while a few big names have stumbled or crumbled — Ted Baker, The Body Shop, Carpetright and Homebase — 2024 has been relatively uneventful for closures. That alone feels like progress after the upheaval of the pandemic years.

Retailer distress: a tamer beast

The retailer distress numbers tell a reassuring story. Compared to the rollercoaster of the last five years, 2024 has been positively boring – and boring is good. Only 886 physical stores have been caught in the crosshairs of CVAs or administrations (YTD, to mid November) — less than half the pre-pandemic annual average of 2,462 stores (2019-2023). The casualty list has been lighter, with no major shockwaves, suggesting a much steadier occupational market overall.

Knight Frank’s crystal ball — the Retailer Watchlist — suggests this calm may hold. Two-thirds (66%) of the Top 300 UK retailers are rated ‘low risk’ with no immediate danger of failure. Only 19.3% are skating on thin ice, identified as a ‘major risk’. And many of those potentially teetering on the brink are digital-first players (9%) rather than bricks-and-mortar/multi-channel staples.

Analysis weighted to turnover reduces the proportion of physical and multi-channel retailers at ‘major risk’ to just 2.2%. Translation: future failures might sting for smaller or niche operators, but they’re unlikely to topple the high street, with larger chains more resilient.

Openings, closures, & vacancies: holding the line

The balance of store openings and closures settled into a more predictable rhythm in 2024 for a third consecutive year. While there was a net store decline of 2,284 closures in H1 2024, this marked a dramatic improvement on the pandemic-era low of 6,001 net closures in H1 2020. Meanwhile, opening activity gained momentum, with 4,661 new units launched in H1 2024 - up from 4,427 in H1 2023, representing a healthy 25 retail openings per day.

However, not all retail sub-sectors are benefitting equally. Out-of-town formats are leading the way, with Retail Parks achieving a rare net gain of +0.4% net openings, while the High Street (-1.5%) and Shopping Centres (-1.0%) remain under more pressure. The categories driving growth - takeaways, cafés, coffee shops, value retailers and convenience stores - are primarily out-of-town, while closures remain concentrated in traditional in-town staples such as chemists, pubs and banks, which accounted for 50% of all net closures.

Vacancy rates reflect these challenges. While Retail Parks have seen vacancies slashed by -100bps to a lean 6.8%, Shopping Centres saw a more modest -20bps improvement to 17.7%, whilst the High Street has been static at 14.0%. Overall, retail and leisure unit vacancies have held steady at 14.0% for five consecutive quarters.

There has been some success in tackling ‘persistent’ vacancies across the board. Shopping Centres in particular have managed to almost halve their mid-term vacancies (2-3 years) to 1.8% (down from 3.1% a year ago) through modernisation efforts. But long-term vacancies (3+ years) remain a stubborn thorn in the retail sector’s side - requiring complex and costly interventions, and possible repurposing for alternative uses.

Rental growth & renewed confidence

Demand for physical retail remained robust in 2024, with several major retailers reinforcing their commitment to bricks-and-mortar stores. Industry leaders such as M&S, Greggs, Aldi and Primark not only expanded their portfolios but also prioritised significant investments in store upgrades and modernisation, highlighting a renewed emphasis on enhancing the in-person shopping experience to stay ahead in an increasingly competitive landscape.

Newer entrants have also contributed to the sector’s momentum, with brands like Sephora, Sostrene Green and Miniso making significant moves to establish or expand their UK physical presence in 2024. Their activities signal growing confidence in the long-term viability of bricks-and-mortar retail, even as the sector navigates mounting budgetary pressures (more on that later).

One clear area of progress is rental growth. Retail rents are forecast to rise by +1.3% in 2024, marking a positive shift across all sub-sectors. Retail Warehousing leads the way with a robust +1.9%, while Shopping Centres are finally returning to positive territory with +1.2% growth — their first since 2017 and a sharp reversal from last year’s -0.4%. High Streets, too, are holding their ground, with a respectable +1.6%, enough to support a cautiously optimistic outlook for the market.

Enter the “Triple Whammy”

If there was a cloud on the horizon, it was this year’s Autumn Budget. Delivering a ‘triple whammy’ of rising costs which threaten to squeeze operators’ margins, the UK government seemingly determined to test just how resilient the retail sector can be:

1. Rising employer NI contributions: From 2025, these will rise from 13.8% to 15%, with the threshold for employee earnings dropping to £5,000. For a sector employing 3.46 million people, this could amount to an additional tax burden of over £3bn annually.
2. Minimum wage hikes: April 2025 will see the minimum wage climb to £12.21/hour, a +6.7% increase that will pile yet more pressure onto operating costs.
3. Business rates revised: Relief for retail, hospitality and leisure properties will plummet from 75% to 40% in 2025, with rate multipliers set to rise too. Long story short: small businesses may struggle to absorb the costs, while larger operators will find more of their marginal stores tipped into unprofitability.

A bitter pill to swallow, but unlikely to trigger a sector-wide crisis. Retail operators are responding with their usual mix of pragmatism and quiet grumbling. Some will double down on efficiency and automation to weather the storm. Others may scale back expansion plans or reconsider their store portfolios. And some will raise prices for consumers to make the numbers add up.

Onwards & upwards: the Retail Renaissance continues

The Retail Renaissance continues, and will not be destabilised completely. Retailer confidence remains surprisingly robust. An outlook survey of 43 senior retail leaders found that 85% expect sales in 2025 to surpass 2024 levels, up from 71% last year. This renewed confidence, coupled with stabilising vacancy rates and positive rental growth, suggests that while challenges remain, the sector’s recovery is on a firmer footing than it has been for years.

As 2024 draws to a close, UK retail occupiers find themselves resilient, adaptable, and - for better or worse - tested to their limits.

Investment Markets

Attitudes towards the retail sector are the most positive they have been for five years. Institutional capital is now active in all of the retail sub-sectors and liquidity has returned to even those sub-sectors previously thought to be too challenged to consider. Total deal volumes at £6.18 billion fall short of 10 year averages at £6.87 billion, but with an element of stability returning to the investment markets next year, we expect a profitable year for retail investors in 2025.

A steady recovery through 2024, that was beginning to gather momentum in the second half of the year, was slowed during Q4 by the double effect of the new Labour Government’s Autumn Budget, along with the US Election in October and November. Primary concerns relate to inflationary measures reversing the rapid reduction in core inflation, along with increasing pressure on low margin retailers needing to fund employer National Insurance Contributions (not to mention the impact on Private Investors considering inheritance tax liabilities).

A slowing of the reduction in the Bank of England Base Rate (and an expectation now that the trajectory through 2025 will be shallower than expected) coupled with outward movement in SWAP rates to around 4% at the time of writing is likely to take into early 2025 to unwind. Notwithstanding this momentary pause, most investors are approaching the retail sectors with greater positivity than in any year since COVID.

All Retail is forecast to return 8.2% on the MSCI Index in 2024 and remains one of the most appealing high-return sectors among UK investment markets (MSCI forecasts for All Property at 5.1%, Industrial at 7.4% and Offices at -5.1%). Retail Warehousing is due to deliver a remarkable return of 12.4% in 2024 and will be a significant outperformer. However, all of the retail sub-sectors now offer appealing risk adjusted returns which is continuing to attract a deep pool of investors to the retail markets.

Retail Warehousing

Retail Warehousing continues its stellar performance with deal volumes of £2.4 billion, up +30% on 2023. Demand continues to originate from numerous sources, all attracted by robust occupational dynamics, with next to no vacancy in prime markets, coupled with limited supply. Rental growth seems a surety and is already evidenced in some retail parks, along with inward yield shift (-75 bps through 2024 to date) – it is easy to see why so many buyers have these investments on their requirement lists.

Larger lot sizes principally appeal to REIT investors (namely British Land), overseas buyers (US Realty) and select UK funds (Columbia Threadneedle). These conviction buyers typically seek yields in excess of 7.00% NIY in return for transacting at a larger scale, typified by British Land’s acquisitions of the Brookfield retail warehousing portfolio in two stages – firstly acquiring parks in Didcot and Merthyr Tydfil for £159m / 7.10% NIY followed by parks in Middlesbrough, Telford, Falkirk, Nottingham, Rugby, Waterlooville and St Helens for £441m / 7.20% NIY.

Institutional demand for retail warehousing investments continues unabated. Most of this originates from local authority pension funds managed by the likes of CBRE IM, abrdn, DTZ IM and KF IM. The only deterrent to these investors appears to be lot size and environmental concerns, principally relating to flooding.

Within target ranges of £15-40m, most sales processes have attracted numerous fund bidders with sales at Longwell Green, Bristol to CBRE IM at £22.59m / 5.60% NIY (with Knight Frank advising the vendor), Anchor Retail Park, Mile End though to be under offer to DTZ IM at c.£38m / 4.45% NIY and Ivybridge Retail Park, Twickenham (under offer to Patrizia at c.£35m / 4.85% NIY) being examples of such deals. Indeed, even some investments with environmental concerns, such as Plough Lane, Wimbledon (selling to M&G at £33m / 5.75% NIY) tick enough boxes for compromises to be found and keen pricing to be paid.

With deep pools of new institutional capital from the likes of Border to Coast, ACCESS and LGPS Central looking for deployment in the coming years, we see no change to this level of demand and with potentially tens of billions to spend, we expect some will filter into the in-town retail sectors as well as out-of-town settings.

Foodstores

Despite the Foodstore market being one of the most popular investment sectors, transaction volumes have remained relatively subdued at £985m for the year (down -63% on the exceptional volumes for 2023). A continued scarcity of stock (with most owners choosing to hold these popular investments rather than sell) is the root cause, although the narrowing arbitrage between Base Rates and the keen yields that were being paid for longer leases secured to Foodstore operators has dampened activity in this space to an extent.

This has not been helped by concerns over the impact of the new Labour Government’s Autumn Budget on the larger, “Big Four” operators such as Sainsbury’s and Tesco. Given the fine trading margins on which they operate they will surely attempt to insulate the shopper from the inflationary impact of these measures, but it is perhaps inevitable that some price rises will find their way into stores and onto shelves.

Specialist buyers continue to trawl the market for opportunities and owners of such covenants should still be comforted that they remain among the best businesses around, and longer term prospects of rental and capital performance remain sound. These operators’ continued willingness to take up pre-emption options to acquire stores they occupy indicates their healthy cash positions and commitment to their store infrastructure.

High Street

The High Street investment market remains the domain of the private investor, with the vast majority of transactions taking place involving private capital. It is easy to understand why, with now-stable covenants paying rebased rents in often fashionable locations and digestible lot sizes, making these investments an obvious target for these groups. Only 1 in 4 transactions take place with repeat buyers, making predicting which buyer is likely to acquire very challenging.

High Streets in Greater London, along with affluent towns in the South East, remain the most favourable markets, largely due to stronger consumer spending dynamics and higher alternative use values (despite a greater acceptance now that physical retail is here to stay). Investments in affluent London suburbs such as 107-143 Muswell Hill Broadway (under offer at £16m / 6.55% NIY) and Crescent Arcade, Greenwich (sold at £25m / 7.25% NIY) are prime examples. Larger rent rolls on traditional prime pitches in major UK cities (Buchanan Street, Glasgow; Market Street, Manchester; New Street, Birmingham; Briggate, Leeds) have exposed these investments to greater scrutiny and so fewer have traded throughout the year.

The relative discount in yields at 6.75% against other more keenly priced sectors (e.g. Industrial prime yields at 5.00% and Retail Warehousing at 5.50%) is sufficient compensation for the additional perceived risk of investing in the High Street space. We expect traditional investor types to see the appeal of this space in the short term, with the opportunity to aggregate portfolios of high-quality stock. French SCPI Property funds including Corum, Sofidy and Iroko Zen are among the first institutional movers, owning similar investments on the continent and now targeting the UK for sustainable high yields.

Shopping Centres

Interest in the Shopping Centre space is the strongest it has been five years. A growing acceptance of their relevance, along with limited opportunities to acquire assets of scale at such discounted yields are driving major investors to consider the sector once again.

However, what was expected to be a flurry of sales activity did not materialise in the second half of the year. A number of larger sales originating from owners seeking to exit since (and in some cases before) COVID were anticipated to reach the market. Instead, open market sales processes tended to originate from administrative or receivership situations which has been typical in the Shopping Centre market for the last few years.

This has not dampened deal volumes though, with £2.17 billion of transactions approaching the 10 year average of £2.26 billion excluding COVID (but still some way behind historic peaks of £3-5 billion). Most of the larger transactions (34% of the total) have involved existing owners upsizing in their prime assets. As a result, the average deal size has increased this year, which is a trend we expect to continue. The likes of M&G (50% of Cribbs Causeway, Bristol at £110m / 8.25% NIY), Hammerson (50% of West Quay, Southampton at £135m / 9.00% NIY) and Norges (50% of Meadowhall, Sheffield at £363m / 8.00% NIY) have all upsized in their existing assets this year. Royal London has also recently added a 50% interest in Centre:MK, Milton Keynes (£140m / 9.00% NIY) in another share sale example.

Principally, these owners are buying into the opportunity for strong, risk-adjusted returns from the prime sectors with yields looking increasingly favourable at 7.50%. Equally, they are purchasing shares of assets they already own at historic discounts with good prospects of value recovery. Occupational demand has improved to the extent that better centres now have relatively few vacant units remaining, and with next to no prospect of future development, these prime, super-regional shopping centres have become something of a rare commodity. There is now the genuine prospect of forward-looking rental growth which, coupled with a stable investment market, should see the sector outperform through 2025.

Outside of these prime centres, the secondary local markets are still reliant on largely the same pool of experienced buyers. Frasers now owns in excess of £250m of shopping centres with recent acquisitions including Fremlin Walk, Maidstone (£25m / 10% NIY) and Princesshay, Exeter (£55m / 10% NIY). M Core (owners of Evolve, Sheet Anchor and LCP property companies) is one of the largest owners of shopping centres in the UK, having recently added The Bridges, Sunderland (£24m / 15% NIY) and Washington Square, Workington (£9.15m / 14% NIY) to their portfolio, to name a few. Both buyers are expected to continue to build their portfolios through 2025, along with a group of Prop Co, private equity and private investors.

Leisure

Leisure-anchored investments remain a challenge, with stubborn concerns over cinemas and the squeezed restaurant sector hampering liquidity in this sector. Despite Cineworld’s ongoing Chapter 11 bankruptcy process providing some certainty to leisure owners, there remains a fear of contagion as other heavily leveraged operators such as Odeon and Vue seek to reduce their liabilities. Knight Frank’s sale of Medway Leisure Park, Rochester (Q: £25m / 9.64% NIY) will be a bellwether test of the market and a positive outcome could pave the way for further leisure sales in this space.

In summary

Ring out the old, ring in the new. The Retail Renaissance that we first called in H2 2023 (and now wish we’d copyrighted) continues apace. Maybe not hitting the dizzying heights of the glory years, but retail is certainly back in the game. And, as with any game, you have to be in it to win it.

A Merry Christmas and hopefully prosperous New Year from the Knight Frank Retail Team.