British Land: surprising resilience of retail parks offers bright spot
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Commercial property investors fret about the number of empty desks sitting in the UK office market. They could console themselves by considering the unexpected revival of the country’s out of town retail parks.
On Tuesday British Land reminded the market that bricks and mortar retail has not vanished. The diversified UK landlord lifted its outlook for rental growth by a third at its retail parks, to between 3 and 5 per cent. After years of poor returns this sector shows signs of recovery.
In fact, retail parks offer one of the sector’s brighter prospects. Out of town sheds now allocate more space for ecommerce warehousing. This enables multichannel formats such as online sales and click and collect. This storage area has doubled since 2019, says Rob Virdee at property analysts Green Street.
The reinvention has turned their fortunes around. Tenants who survived the worst now thrive, delivering better cash flows.
Retail property valuations peaked in 2015. Since then they have more than halved. High streets have lost around 3,000 units permanently, the reduction at shopping malls has been smaller. But supply retail parks have grown.
Rental yields tell the same story. Across the retail sector, yields now hover in the low double digit percentage range. Capital values have dropped as landlords anticipate lower rents from struggling tenants. Meanwhile, improved performance for retail parks has compressed yields down to high single digits. That looks attractive when compared to residential and offices, where valuations could fall further.
This should be good news for British Land. It has the largest retail park portfolio in the UK. Even so, its share price has declined more than 20 per cent this year, trailing rival Land Securities by 15 per cent. Some doubts about British Land’s strategy persist. It bought into urban logistics (warehousing) during the pandemic at very low yields.
But retail parks accounted for over a seventh of British Land’s valuation as of March this year. These should offer some buffer against any further weakness in the group’s larger exposure to the City.
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