THE STATE OF PLAY IN OUT-OF-TOWN RETAIL

P A R K L I F E THE STATE OF PLAY IN OUT-OF-TOWN RETAIL Winter 2017 1

KEY TAKEAWAYS Despite some recovery, the number of retail warehouse transactions in 2017 is unlikely to reach the peak of 2015. However, it is anticipated that the sector will have the highest volume of sales in the retail investment market as a whole. The gap to peak pricing has narrowed further to 138 bps. Pricing for retail warehousing has contracted and yields have fallen. Investors are seeking the best assets, with the lowest risk profile, as they seek to protect capital. Retail parks continue to have the biggest footfall increases year on year, with concerted growth since 2013, and seven months of consecutive footfall growth since March 2017. Good accessibility, free parking and convenient Click & Collect points continue to drive shoppers to retail parks, whilst shopping centres and high streets have witnessed declining footfall. We are witnessing the lowest vacancy rates on retail parks in nearly 20 years, with most vacant properties being filled quickly. The level of vacancy on retail parks is lower than other retail assets despite the rationalisation and administration of several high profile retailers over recent years. There is strong intent amongst developers for new schemes, but finding the right locations that are attractive to tenants is challenging. There has been a sharp increase in the number of planning applications submitted for new out-of-town retail schemes since 2013, although it is likely that only one in five of these will be developed. The out-of-town offer has evolved from white goods and electronics to leisure, fashion and new DIY concepts. Half of all retail parks now contain leisure, and the ongoing roll out of the Bunnings portfolio is set to bring a fresh, new approach to conventional bricks and mortar DIY stores. Continued urbanisation and more attractive residential land values pose a threat for retail warehouses within the M25. Retail parks within London are under a growing threat from residential redevelopment. More mixed-use developments are expected in the future, due to the pressures of urbanisation and high land values. Driverless cars pose a potential threat to retail warehousing if active asset management is not undertaken. The beneficial aspects of out-of-town parks such as convenience and free parking become less significant with the introduction of driverless cars. Active asset management will be necessary to create distinctive and quality destinations that are future-proofed. 2 PARK LIFE RESEARCH REPORT 3

INVESTMENT ACTIVITY Recent deals indicate that the sector is returning back to health, following a peak in 2015 Following a spike in activity in 2015, when investment volumes exceeded 5bn, the number of transactions is returning to pre-peak levels. As of November 2017, investment values are in excess of 2.2bn, on top of many significant deals which have not been publicly marketed. Recent noteworthy transactions that indicate the sector s return to health include Surrey County Council s acquisition of Malvern Shopping Park for 75m and Hampshire County Council s acquisition of Mallard Retail Park from TH Real Estate for 47m. Local Authorities continue to invest in parks to generate revenue for local services, and although these new requirements are generally for smaller lot sizes, these deals show that some councils do have capacity for larger assets. The retail warehousing market continues to show resilience, despite economic and political uncertainty, with attractive yields and returns. The out-oftown format is also well placed to bridge the gap between online and offline consumption, with the ability to provide for, and benefit from the growing Click & Collect market. FIGURE 1: TRANSACTION VOLUMES BY ASSET TYPE Total Investment Value ( m) 6,000 5,000 4,000 3,000 2,000 1,000 0 Retail Warehouse Shopping Centre Supermarket Unit Shops 2012 2013 2014 2015 2016 2017 Note: 2017 totals are up to the end of November Source: Property Data 4 PARK LIFE RESEARCH REPORT 5

INVESTMENT ACTIVITY The gap to peak pricing has further narrowed, with Investors, especially traditional UK institutions, are increasingly seeking prime retail warehouse opportunities as they are viewed as the most secure and arguably safe assets to invest their capital in. This strategy, partly driven by an increasingly uncertain economic outlook, has seen the gap to peak market pricing narrow further. FIGURE 2: GAP TO PEAK PRICING Retail Warehouse Shopping Centres 12 10 Supermarket High Street yields expected to reduce to a greater extent A recent key deal is the sale of the Mid Sussex Retail Park to DTZIM for 17.3m reflecting a Net Initial Yield of 4.71%. The property comprises 54,420 sq ft and is let to B&Q and Pets at Home. Another noteworthy deal was the acquisition of Pipps Hill Retail Park in Basildon by Royal London. The 220,000 sq ft park anchored by Asda, B&Q, Wren Kitchens and T K Maxx was acquired for 86.5m, reflecting a Net Initial Yield of 5.62%. Initial Yield (%) 8 6 4 138 bps 2 0 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Source: MSCI 6 PARK LIFE RESEARCH REPORT 7

PERFORMANCE We are seeing a number of new investors enter the market - some from overseas The biggest investment opportunities are in the secondary market, where improved performance can be unlocked via asset management initiatives. As a consequence, we are seeing a number of new investors enter the market - some from overseas - acquiring assets where there is an expectation to improve the asset and hopefully, get an edge on yield. Total forecast returns for the retail warehouse sub-market, between 2017 to 2021, are expected to be 4.2% per annum. This is on a par with shopping centres, and ahead of standard retail and supermarkets. The total returns for UK Property were roughly in line with the FTSE 100 as of September 2017 as highlighted in Figure 4. FIGURE 3: TOTAL RETURNS % Return Retail Warehouse Shopping Centre Standard Retail Supermarket Average 18 16 14 12 10 08 06 04 02 00 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 2017-2021 F Source: Colliers International, MSCI FIGURE 4: TOTAL RETURNS BY ASSET CLASS 30 FTSE 100 Gilts UK Property 25 20 15 % per annum 10 5 0-5 -10 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Source: Colliers International, MSCI 8 PARK LIFE RESEARCH REPORT 9

FOOTFALL Retail parks continue to see relatively strong footfall growth when compared with other retail assets and locations. Footfall in retail park locations remains particularly strong, despite the downward trend witnessed across other asset types. Following a positive start to the year, particularly around Easter, footfall has been on a downward trajectory at shopping centres and high streets. However, retail parks saw strong footfall year on year with consistent growth between March and September 2017. In the last month, footfall on retail parks has fallen marginally due to a cooling before the Christmas peak - but parks have still performed stronger than other retail destinations. CONVENIENCE AND ACCESSIBILITY Travelling to out-of-town destinations avoids the congestion of inner-city areas. Retail parks contain a wide product selection in one place. PARKING Free and plentiful parking CLICK & COLLECT Easy accessibility and free parking make retail parks an attractive option for picking up goods. Click & Collect drives frequency and encourages further discretionary spend. FIGURE 5: FOOTFALL % Change in Footfall y/y (3 month moving average) High Street Retail Park Shopping Centre Weighted UK Average 4 3 2 1 0-1 -2-3 -4-5 -6 IMPROVED FACILITIES Widening range of brands and leisure facilities, creating popular and attractive destinations for shoppers. -7-8 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16 Oct 17 Source: Springboard 10 PARK LIFE RESEARCH REPORT 11

VACANCY RATES Retail warehouse vacancy rates have dropped to their lowest level in nearly 20 years Retail parks have the lowest vacancy rates of major retail assets in the UK, standing at 5.9% in September 2017. This is expected to fall even further over the coming months. Retail park vacancies have been on a strong downward trend over the last decade, despite several high profile brands downsizing their portfolios, such as Toys R Us, or entering administration. Demand for quality units in prime locations has been strong, and discount retailers such as B&M and Home Bargains have been absorbing other excess space that has re-entered the market. The UK discount market is expected to grow a further 40% over the next five years to 32.5 billion, driven by widening product ranges and more consumers turning to value retail in the wake of rising living costs. The outof-town sector is therefore increasingly competitive, benefitting from strong demand from quality retailers. Rental growth is expected in good secondary schemes where asset management can lead to a stronger tenant mix, resulting in a more desirable location. Alongside this, lease renewals provide the opportunity for rent rebasing, with only a few tenants such as Argos and Carpetright choosing to move out. FIGURE 6: VACANCY RATES Average Vacancy Rate Open A1 Schemes Open Non-Food Schemes Bulky Goods/Restricted % Vacant Floorspace 15 12 9 6 3 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Trevor Wood Associates 12 PARK LIFE RESEARCH REPORT 13

DEVELOPMENT Strong intent amongst developers for new out-of-town schemes There has been a sharp increase in the number of planning applications submitted for new out-of-town retail schemes since 2013, demonstrating strong intent amongst developers. Over the last ten years, this equates to nearly 13m sq ft of new retail space in planning. Despite the large number of applications, it is expected that only one in five will actually get built. As an example there are 3-5 potential retail schemes in Truro which are at various stages in the development process. However, it is likely that only one of these - Hydra Retail Park - will be developed in the short term. Recent schemes which have successfully opened include: Epping Forest Shopping Park, Loughton: 95,000 sq ft of ground floor retail containing Hobbycraft, TK Maxx, Aldi, Next, Smyths Toys and Mothercare. Rushden Lakes, Northamptonshire: 230,000 sq ft of retail which also offers dining and leisure activities such as canoeing, cycling and golf. Liverpool Shopping Park: opening at the end of the year, the park will comprise 727,000 sq ft anchored by TK Maxx and M&S Food Hall. A key development in the pipeline is the 135m extension of Fosse Shopping Park, one of the UK s most successful parks. Despite its mid-market positioning, Fosse Park currently generates the highest rent of any retail park in the UK at 100 psf. FIGURE 7: DEVELOPMENT PIPELINE BY YEAR AND SCHEME TYPE Grocery Leisure Retail & Leisure Retail Park Retail Warehouse Shopping Park Retail Warehouse Development (sq ft) 7 6 5 4 3 2 1 0 2015 2016 2017 2018 2019 2020 TBC - unknown development year Source: Trevor Wood Associates/ PMA 14 PARK LIFE RESEARCH REPORT 15

OCCUPIERS The number of discount grocery stores anchoring out-of-town schemes has increased by 78% in six years DISCOUNTERS Traditionally, the retail warehouse offer consisted of white goods, hardware and electronics, however, this is now shifting towards fashion, entertainment and discounters. Many new developments are being anchored by Aldi or Lidl, such as Burgh Road Retail Park in Skegness (which opened in October 2017) and St James Retail Park in Sheffield (due to open in Spring 2018). The number of discount grocery stores anchoring out-of-town schemes has increased by 78% in the last six years. FOOD & BEVERAGE There has been a significant improvement and broadening of the F&B and leisure offer on retail parks over a number of years; more than half of retail parks now contain at least one leisure operator. Whilst the range is starting to become more attractive and diverse, fast food continues to dominate, with the top F&B operators on parks including McDonald s, Costa, KFC, Pizza Hut and Frankie & Benny s. Casual dining brands on retail parks are beginning to lose their edge, a trend witnessed across the F&B market as a whole, whereas coffee shops show no sign of losing popularity. We are seeing a growing trend in drive-thru convenience, particularly the likes of Starbucks and Costa, which only require a relatively small amount of space, yet provide an attractive hook for a scheme. The DIY market will grow 10.4% in the five years to 2022, an increase of 5.0 percentage points on the previous five years growth. DIY AND GARDENING The DIY sector has been hit by fewer housing transactions in 2016 and 2017, however, growth is expected to return from 2018. The recent slowdown in the sector is reflected in the poor results from the leading DIY brands, such as Kingfisher s reported 6.3% decline in sales in H1 2017/18. Bunnings has also reported a challenging start to its first full year of ownership, but is positioning itself for success by offering something different to typical DIY stores. The brand is placing a heavy focus on customer experience such as offering in-store events, barbecues and children s playgrounds, giving customers a reason to visit and keep coming back. Currently the group has only converted 7 stores into the Bunnings fascia out of a portfolio of 255, with a further 3 due by the end of 2017. Online home improvements brand ManoMano, a new entrant from France, has recently secured a 60m investment to fuel its next stage of growth in the UK and internationally. ManoMano has an online marketplace that runs in tandem with a community network, where DIY enthusiasts can get advice and support for their projects. Off the back of this service, the company is also poised to launch a new service, SuperMano, where users can post small DIY jobs and experts can pitch for the work. The brand is connecting online with offline, in a similar vein to Ikea s recent purchase of Task Rabbit. With more DIY warehouses being converted into either smaller units or residential property, this sector will need to evolve its traditional proposition (especially in London) in order to retain a physical presence - or accept to trading under residential or from much smaller units. 16 PARK LIFE RESEARCH REPORT 17

SWOT ANALYSIS Growing residential land values pose a threat for retail warehouse redevelopment, particularly within the M25 Retail parks are under threat from redevelopment into residential schemes, due to elevated land values. This is illustrated by cases such as Hurlingham Retail Park in Wandsworth, where planning has been approved for a mixed-use development comprising 240 new homes and 33,000 sq ft of commercial floor space. Similarly, Decathlon in Canada Water will be rehoused in a 100,000 sq ft double height unit under a new 1,000-unit residential development, which will also include a cinema, bar and restaurant. We expect to see several more examples of this type of redevelopment in London, however, the majority of locations outside of the M25 do not have the demand for residential to support a change in use. In an effort to protect against redevelopment, a number of occupiers are buying freeholds to gain control of the premises, or re-gearing leases 5-10 years before expiry. For other locations, however, we are seeing funds purchasing sites with less than a decade remaining on the lease, who plan to release value by making way for residential in the future. STRENGTHS Out-of-town retail benefits from accessibility, convenience and a cost-effective shopping trip that is difficult to replicate elsewhere. Click & Collect is a major pull particularly boosted by free parking and growth of the service is strong. Ongoing demand for discounters and food WEAKNESSES Is the high street making a comeback? Consumers are becoming more interested in authenticity and independent brands which high streets can accommodate, but are less prevalent on retail parks. OPPORTUNITIES Growth is not necessarily in the best parks, but in strong secondary, where the tenant mix can be improved with active asset management. Opportunity for retail parks to incorporate leisure and experience operators such as Go Ape and Adventure Golf. THREATS Likely to see further retailer administrations in 2017/18. The raft of planning applications may result in oversupply of retail warehouse space. Ongoing threat of change in use to residential. Total supply might not change as old will be replaced with new. 18 PARK LIFE RESEARCH REPORT 19

PREDICTIONS DRIVERLESS CARS The beneficial aspects of out-of-town parks such as ease of access, convenience and free parking become less significant with the introduction of driverless cars. Intensive asset management is required to create attractive, distinctive and quality destinations to ensure that retail parks don t lose their edge. Driverless cars reduce the need for parking, resulting in potential change of land use, such as drive-thru Click & Collect points to make the service even quicker and convenient. Their introduction may also result in widening catchments, as they make out-of-town locations more accessible to both younger and older generations who don t need to be able to drive. URBANISATION AND FUTURE FORMATS Continued urbanisation in London and the lack of residential space are boosting residential land prices, which will have a knock-on effect on retail warehousing. We expect to see a growing number of mixeduse schemes with one or two floors of retail warehousing beneath residential developments, and little to no car parking. It is likely that open space car parks will be eliminated within the M25, due to urbanisation pressures and driverless cars. Click & Collect is already reducing pressure on car parks as customers make quick trips to pick up goods and leave. Stores will primarily function as showrooms for bulky goods and only smaller items that can be carried away will be stocked, reducing storage space requirements. DIY retailers will occupy bigger units, as their stores evolve into distribution hubs and Click & Collect points. There will be an increased expectation for fast, cheap and efficient delivery of goods, particularly as car ownership declines. THE WAY PEOPLE USE AND EXPERIENCE RETAIL WAREHOUSES WILL CHANGE AS TIME BECOMES MORE VALUABLE THAN MONEY The value of time is becoming even more important in the purchasing process: from instant online price comparison, to quick payment methods and same day delivery. More consumers than ever are adopting services such as Task Rabbit to put together their flat-pack furniture for them (even though in total they are probably spending the equivalent of a ready-made piece of furniture!) Will we start to see Click & Collect drive-thrus? The concept is beneficial for the consumer, however retailers benefit from providing the service in-store so that there is the opportunity to upsell or encourage impulse purchases. The consumer experience is still vital in the out of town sector, and F&B will become even more crucial in the future. OUT-OF-TOWN SUPERMARKETS WILL BECOME THE NEW DEPARTMENT STORES Next is the latest retailer to open a supermarket concession, taking space in a large London Tesco store. Renting out space to third party brands enables supermarkets to utilise excess capacity and the additional income provides some relief against business rate increases and the absorption of food price inflation. The merging of grocery with different types of retail brands also encourages non-food visits to supermarkets and can boost dwell times. Next joins Arcadia, Dixons Carphone and Holland & Barratt which have been introduced within Tesco, while Sainsbury s has begun the roll out of Argos and Habitat concessions. We expect to see further third party tie-ups in the future, as supermarkets appear to operate more like department stores. 20 PARK LIFE RESEARCH REPORT 21

FOR MORE INFORMATION OUT-OF-TOWN RETAIL AGENCY Nick Turk Director Lease Advisory +44 20 7344 6555 nick.turk@colliers.com Laurence Edwards Director Retail Agency +44 20 7487 1870 laurence.edwards@colliers.com OUT-OF-TOWN RETAIL CAPITAL MARKETS Tom Edson Head of Out of Town Investment +44 20 7344 6554 tom.edson@colliers.com Georgie Griffiths Surveyor +44 20 7344 6611 georgie.griffiths@colliers.com RESEARCH & FORECASTING Mark Charlton Head of Research & Forecasting +44 20 7487 1720 mark.charlton@colliers.com RETAIL CONSULTANCY Matt Thompson Associate Director +44 20 7344 6817 matthew.thompson@colliers.com This report gives information based primarily on Colliers International data, which may be helpful in anticipating trends in the property sector. However, no warranty is given as to the accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or conclusions contained in this report and they must not be relied on for investment or any other purposes. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property. (December 2017) Colliers International. Colliers International is the licensed trading name of Colliers International Property Advisers UK LLP which is a limited liability partnership registered in England and Wales with registered number OC385143. Our registered office is at 50 George Street, London W1U 7GA. 17432 22 PARK LIFE RESEARCH REPORT 23

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