Finally, physical retail is bouncing back

One swallow does not a summer make, but when British Land splashes out £441m on a portfolio of retail parks and is followed by a second swallow – Frasers’ acquisition of more than 1m sq ft of retail space across three shopping centres – it at least looks as though retail’s seemingly endless winter might finally be over. So, whisper it quietly, could the retail sector finally be bouncing back?

The sector’s future is not yet so bright you’ve got to wear shades – two schemes that came to market last week have been put up for sale by receivers and need to find buyers – but the fact that two retail heavyweights are betting big on the recovery of physical retail bodes well.

Clearly, both think the numbers now stack up. British Land’s acquisition reflects a net initial yield of 6.7% and a topped up net initial yield of 7.2%. Another major draw is that the assets are 99% occupied and generate a passing rent of circa £29.5m, with strong rental growth prospects.

As British Land chief executive Simon Carter said: “Combined with the proposed placing, they will be immediately earnings accretive and are expected to deliver double-digit ungeared IRRs.”

What’s not to like? Not much as far as British Land is concerned, which is why it has deployed £711m of capital in the sub-sector since 1 April.

Frasers chief executive Michael Murray is equally bullish about the three shopping centres – in Exeter, Maidstone and Gloucester – it has acquired. The acquisition “reinforces [the company’s] commitment to investing in physical retail,” he said. “Such acquisitions unlock new growth opportunities for our retail concepts, while revitalising high streets and physical shopping locations up and down the country.”

There are other signs of increased activity – and confidence – in the retail sector. In September, NewRiver REIT announced it had raised £50.2m from investors to support a possible £147m takeover bid for UK shopping centre landlord Capital & Regional. The board said that the deal, which would value their combined retail assets at £0.9bn, presented “a unique opportunity to create a significantly enlarged portfolio at an attractive point in the market cycle”.

This week, Wain Estates sold the retail-led Bramhall Village Square in south Manchester to Sheet Anchor Commercial Property and last week, two retail schemes were brought to market.

The level of appetite for the two assets up for sale will give greater clarity on the extent of retail’s resurgence. The long leasehold interest in Festival Place shopping centre in Basingstoke (pictured), which was put up for sale by receivers BDO, is being marketed by Savills as presenting “significant asset management opportunities, driven by strong tenant demand and performance.”

The other asset, meanwhile, offers a highly attractive potential yield. The freehold interest in the Castle Quarter retail and leisure scheme in Norwich, which has been put up for sale for £23.55m+ by the joint LPA/fixed charge receivers, would deliver a net initial yield of 10% if sold at that price.

Yields won’t stay in double digits for long if investor demand continues to grow and all the signs are that it will. UK investment volumes reached £12.3bn in the second quarter of 2024, the highest level in nearly two years, according to Colliers’ latest Real Estate Investment Forecasts report.

Retail investment levels are now tracking above the five-year quarterly average, it notes, adding that yields are beginning to compress across most retail segments, led by standard shops (-17bps) and shopping centres (-15bps). It predicts that demand for retail assets will improve further this year “with pricing still looking very attractive” and that retail warehouses will be the sector’s star performer.

Time will tell, but expect more swallows to join what may well become a swoop on retail and the sun to shine on the sector once more.