Retail

Retail sales are expected to remain subdued in 2024. While expansion will be on the cards for some, with trading conditions expected to remain challenging modest vacancy rate rises are anticipated. Retail’s investment profile will remain diversified – while Retail Parks will continue to be the top choice for many, the recent increase in popularity of other sub-sectors will extend into 2024.

Key Takeaways

1. UK retail sales volumes have remained below 2019 levels throughout 2023. Subdued performance is expected to continue into 2024, with meaningful growth not expected to resume until later in the year.
2. Online penetrations have broadly returned to pre-pandemic (2015-2019) trend. Considering projections of online penetration drivers, we expect to see continued moderate growth, reaching 28% by the end of 2024.
3. Profit margins are set to remain under pressure in the year ahead. Occupiers will continue to encourage consumers to utilise their physical store network to maximise profitability.
4. Expansion will be likely for some, albeit the focus will be on ‘safe bet’ locations. Given trading conditions are expected to remain challenging in the year ahead, modest vacancy rate rises are anticipated.
5. Retail pricing will remain attractive versus other commercial sectors in the year ahead. While Retail Parks will remain top choice for many, interest in Grocery and Shopping Centres looks set to continue.

Pressures still loom over sales performance 

Despite seeing improvements throughout the course of this year, GfK’s consumer confidence. metric remains firmly in negative territory – highlightings the continued impact of the cost of living crisis. Weakened confidence has also translated to a fall in spend, and sales volumes have consistently remained below 2019 levels throughout the year.  

Looking ahead to 2024, we are cautious. The base rate is expected to be held throughout H1 2024 therefore consumer confidence is likely to remain subdued and spending controlled as more households refinance at higher interest rates. Meaningful growth is not expected to resume until H2 2024, when the current market conditions which incentivise savings over spending starts to revert. If the base rate is held for longer than anticipated, this could prolong the current stagnation.  

Against a challenging macroeconomic backdrop, where many consumers will find themselves prioritising their spending, we anticipate asset performance will become even more polarised. Convenience schemes that deliver every day essentials will continue to be well frequented, meanwhile treat spending will be saved for regional schemes with a diverse and experience led tenant mix. Assets that do not fulfil these types of shopping trips will struggle to retain market share.

Figure 12: UK retail sales volumes (Index 2019 = 100)

Source: ONS, CBRE Research

Figure 13: UK online penetration rate, 2015-19 trend and actual (%)

Source: CBRE Research, Euromonitor, Eurostat

Online penetrations have returned to pre-pandemic trend 

Our recent research, E-Commerce in a Post-Pandemic Era, highlights the UK’s online penetration has broadly returned to pre-pandemic trend. Despite a surge in growth throughout the pandemic, online penetrations moderated in 2022 and reached their lowest point at the start of this year. However, throughout 2023, penetrations have been gradually increasing, and as of October, stand at 26.6%. Considering projections of online penetration drivers such as demography, internet usage, culture, and infrastructure, we expect to see continued moderate growth, reaching 28% by the end of 2024.  

This said, with margins remaining under pressure, we anticipate retailers will continue to encourage consumers to utilise their physical store network to maximise profitability. Following the early adopters, more brands are expected to introduce fees for online returns. Additionally, occupiers will continue to develop their breadth of in-store services, creating a point of differentiation versus online.  

Vacancy expected to moderately rise, but prime assets will remain in demand 

Some high-profile retail administrations have resulted in vacancy rates increasing by 30 basis points – returning to Q1 2022 levels of 11.7%. However, this trend is not consistent across all assets. 

The Retail Parks vacancy rate continues to narrow, appealing to a broadening tenant base. Strongly aligned with consumer trends, we anticipate this retail sub-sector will continue to perform well in the year ahead. While the average Shopping Centre vacancy rate remains high, in prime assets, occupancy levels are much greater. Best in class assets are achieving competitive tension and subsequent rental growth. Reflecting their sustained appeal, in 2023 many occupiers have upsized their units in these locations to deliver the highest quality experiences for their consumers – a trend we expect to continue in the year ahead. 

While the business rates revaluation which came into effect this year has boosted occupier affordability in 2023, the Chancellor’s recent decision to not scrap an inflation-linked rise will dampen the revaluation’s positive impact in 2024.  

Despite this, expansion is still expected to be on the cards for some – albeit the increased costs associated with store openings will lead to occupiers focusing on ‘safe bet locations’. Given trading conditions are expected to remain challenging in the year ahead, modest vacancy rate rises are anticipated. 

While retail parks remain popular, appetite for other retail sub-sectors increases 

Reflective of the weak economic backdrop, UK retail investment volumes are down 30% year on year, at £4.76bn. However, pricing remains stable and attractive when compared to other commercial property sectors.  

Throughout the year, the market has become more diversified, a trend we expect to continue into 2024. While Retail Parks continue to account for almost a third of all investment and are expected to remain the top choice for many – offering strong fundamentals and relatively small-lot sizes – other sub-sectors have increased in popularity.  

Offering recession-resilient fundamentals, the Grocery sector has had a strong year, accounting for 26% of investment. Robust volumes are expected to trade in the year ahead as the steady supply of stock through sale and leasebacks is complemented by an investor pool actively seeking secure income assets. Meanwhile, Shopping Centres have also reported a notable uptick in activity. While secondary assets continue to attract opportunistic investors and local authorities, prime activity is also starting to resume. Market polarisation has solidified the fundamentals of the highest-quality assets; in the year ahead, we anticipate an increasing breadth of buyers will explore this segment of the market. 

Figure 14: UK retail investment profile

Source: CBRE Research

Repurposing is more applicable to some than others 

The UK retail market continues to grapple with a supply and demand imbalance, creating clear divisions in performance. 

For many landlords, repurposing will remain a priority in 2024, particularly given the continued forecasted growth of online penetrations, and softening of demand due to macroeconomic conditions. Reallocation of space to other uses not only increases the likelihood of achieving competitive tension in the remaining retail space but can also positively impact footfall and bring a new profile of customer to an asset.  

However, asset strategies should be under constant review in this fast-changing environment. While the swathe of CVAs that occurred pre-COVID and shakeout of weak performers during the pandemic might have once pointed to repurposing as the solution, certain prime assets are now seeing a resurgence of occupier demand. Moreover, considering the elevated cost of capital, assets remaining as retail might have returned to the most viable option.