Uncertainty is an opportunity for investors looking to the UK
Retail property investments in Britain, especially London, still have the potential to yield long-term returns
UK retail property has long been a magnet for investment from Asia, underpinned by strong fundamentals that will continue to drive it even in times of uncertainty. This includes a mature e-commerce model, a sophisticated logistics network, diversity in retail locations and a similar consumer demographic. As the capital, London remains a powerhouse, a gateway city for global investors drawn by often double digital digit rental growth on its prime streets. In fact, London shops have been seen by many as the ultimate safe haven investment, with buyers bucking the ‘wait and see’ trend this year despite the odds. This is due to the quality of assets being sold.
CBRE’s own figures show that £1 billion has been transacted in London retail in the first half of the year, with another £600 million expected to complete later this month, and £400 million more on the market. To put this in context, volumes for the typically slower first half of the year have averaged around £700 million over the past few years. The last few weeks have seen the sale of Debenhams’ Oxford Street flagship store from British Land in one of the biggest deals in London since the EU referendum. Spanning 363,000 sq ft, the seven storey building was sold for £400 million to a private investor and is testament to the strength of confidence in the market. Another notable example this year is the sale of Zara’s new flagship at 61-71 Oxford Street for £183 million. With the date of the EU referendum announced before the latter completed, and the Debenhams sale in the immediate aftermath, the deals are proof that, with the right insight and on-the-ground knowledge, investments can be found to suit business needs.
While 75 per cent of Central London retail investment by Asian buyers has been on Oxford Street and Bond Street, the draw of London’s luxury streets is another important factor. Only last month, 169 New Bond Street, let to luxury watch and jewellery brand Piaget, sold for a record £65 million. The deal for the 3,500 sq ft boutique store represents the highest price paid per square foot for a UK real estate asset, and is a reflection of the healthy competition maintained around London’s most exclusive shopping destinations.
Some have questioned the outlook for investment in the UK in light of Brexit, and the value of the sterling against the yuan reached an all-time low. However, against this backdrop, prime London retail is still seen as a sector offering long-term income and capital preservation. A fall in currency actually presents a buying opportunity, and overseas buyers, who represented 60 per cent of volumes in the first half of 2016, stand to benefit from a significant advantage.
Devaluation will also have a positive impact on tourism, drawing visitors to London specifically and increasing footfall and spend. We are already seeing Chinese tour operators reporting huge spikes in searches for UK holidays, and while this is a short-term reaction, again it presents an opportunity.
From a retailer’s perspective, if part of the draw to the capital is exposure to an international audience, diversity amongst consumer base and ability to spend in the billions, then a boost to these numbers will go a long way to driving brand exposure. When considering the economic headwinds faced by China over the last few years, the explosive growth of its middle class has led to a rebalancing to a more consumer-led economy. This rebalancing is still going on, and will be very gradual, but the spending power of the consumer cannot be ignored. Sophisticated and discerning shoppers make trading competitive, but if retailers get it right, shoppers will return time and again.
Looking at Hong Kong in particular, weakening retail rents as landlords face pressure from tenants to renegotiate is another factor behind the more aggressive pursuit of prime London assets over the last few years. Since 2011, Asian investors have injected an average of £256 million per year in London retail, representing 11 per cent of the market. In 2016 so far, they have represented 16 per cent, and Hong Kong buyers are the dominant source of Asian capital, with 70 per cent of market share. This is by no means restricted to the luxury market, but where luxury retail goes, the rest will ultimately follow.
There will be a period of adaptation in London and the UK now the result of the referendum is known, but its position in the eyes of investors remains strong. Continued focus on transport infrastructure, including the arrival of Crossrail in 2018, is another factor in London’s long-term resilience, not least due to the rental growth it will deliver. For retailers in search of the next step in their expansion plans, and investors seeking returns, London has – in 2016 so far alone – shown it can still command the right attention. Its standing as a retail gateway city is not faltering, and its diversity of location and draw for tourists is a magnet for investors and retailers alike. While London takes the spotlight, it is not the only jewel in the crown and the retail fundamentals that have driven the UK market for so long reach well beyond the capital.
The flow of capital from Asia, and most notably Hong Kong, is something that has been established over the years. It is inevitable that there will be changes, but this relationship will continue to play a key role in the retail market for many years.
Phil Cann is head of retail at CBRE UK