A deepening pool of investors is circling opportunities in the shopping centre market, buoyed by increased signs of stability and recovery across the retail sector.

Download the Shopping Centres Revisited 2024 report in full here →

A recent report by property consultancy Lambert Smith Hampton (LSH) highlights improving sentiment across the shopping centre investment market, with a growing range of investors now pursuing opportunities in the previously out-of-favour sector. While there are still serious challenges facing many UK shopping locations, recovering retail occupier demand, stabilising asset values and an improving debt market are all boosting investor confidence.

BUYER POOL DEEPENS

Shopping centre investment volumes have hit a seven-year high in 2024, with £1.3bn of assets transacted during Q1-Q3. While local authorities and investors seeking repurposing opportunities have propped up meagre activity in previous years, the recent uptick reflects an increasingly broad range of investment rationales and buyer types.

The prime end of the market has seen a revival in activity, with stakes in two of the UK’s largest shopping centres, Meadowhall and Bluewater, trading earlier this year. The prime market is being buoyed by the return of several institutional investors and REITs that have been absent from shopping centre transactions in recent years, with their demand narrowly focused on the most dominant regional centres in the UK.

However, the most prolific investor in shopping centres this year has been Mike Ashley’s Frasers Group, which has bought Frenchgate Shopping Centre, Doncaster; Fremlin Walk, Maidstone; St Nicholas Arcades, Lancaster; and Princesshay, Exeter. While these deals have benefits for Frasers’ retail business, helping it to expand the footprint of its own brands in the centres, the group has also been able to take advantage of attractive pricing levels.

INCREASING SIGNS OF STABILITY

The stabilisation of shopping centre values has encouraged investors to re-enter the market. Shopping centre asset values bottomed out during H1 2024, after falling by 14% since mid-2022, and by 70% since the 2007 peak, and have begun to tick upwards in recent months. Prime yields have hardened, coming in by 50bps during 2024 to stand at 8.00% in Q3, while under-offer deals are expected to drive a further substantial hardening of prime yields.

As a result of moderate capital growth and healthy income returns, the shopping centre sector is forecast to record an annual total return of 8.4% in 2024, making it one of the best-performing parts of the UK commercial property market. Shopping centre returns are expected to outstrip both the wider retail sector (8.0%) and the other core commercial sectors of industrial (6.9%) and offices (1.1%).

Improved sentiment in the shopping centre investment market is mirrored by signs of recovery in the occupier market. Having weathered the challenges of the pandemic and the cost-of-living crisis, an increasing number of major retailers are now in growth mode. Value retailers such as The Range, B&M, Home Bargains and Poundland have proven resilient; while a key emerging trend is the roll-out of more compact, centrally-located stores by traditional retail warehouse occupiers such as B&Q, Screwfix, Dunelm and Pets at Home.

CHALLENGES REMAIN

Nonetheless, the underlying structural challenges facing shopping centres remain clear. Vacancy rates are still very high in many centres, especially those that have struggled to reoccupy large units vacated by collapsed retailers such as Debenhams and Wilko. An LSH/Revo survey conducted earlier this year highlighted the issue of excess space, suggesting that somewhere between 20-40% of all UK retail space may ultimately need to be redeveloped to repurposed to other uses.

Following an audit of UK shopping centres, the LSH report estimates that 12% of UK shopping centres will need to be demolished and replaced with new schemes led by non-retail uses. A further 40% are likely to require large-scale repurposing and redevelopment to add new uses around a consolidated retail offer. Positively, a wave of redevelopment projects is now underway, including many being led by local authorities, with a high-profile example being the demolition of the Castlegate Shopping Centre, Stockton-on-Tees, which is in the process of being replaced by a new urban park.

Repurposing and repositioning activity is crucial to increasing the vitality of shopping centres, and the broad goal for many landlords should be their evolution from single-use retail locations to diverse mixed-use places that provide people with more reasons to come to them and to stay for longer. Leisure and food & beverage uses are taking growing footprints in many centres; while healthcare, residential and community uses are also key opportunity areas.

Encouragingly, consumers are showing that they still have appetites for physical retail experiences, but shopping centre landlords will still need to make bold and decisive decisions around future use mixes, to ensure their centres have vital roles to play within their communities.

Sean Prigmore, LSH’s national head of retail said: “While there remain significant challenges across the shopping centre sector, 2024 has delivered encouraging signs of green shoots in both occupier and investment markets. The revival in investor demand represents a strong vote of confidence in the future of shopping centres. With institutions and REITs returning to the investment market, and private investors remaining attracted by value and income opportunities, shopping centres are now being targeted by a more diverse range of potential buyers than has been the case at any time in the last decade.”

Dr Steven Norris, national head of planning, regeneration + infrastructure (PR+I) at LSH, added: “Shopping centres provide unique opportunities for the delivery of regeneration projects in the heart of the UK’s towns and cities. As large assets that are usually under single ownership, strategic and holistic decisions can be made about future use mixes in a way that is rarely possible on high streets where ownership is more fragmented.

“LSH’s multi-disciplinary team is taking a key role in many of the UK’s most important shopping centre repurposing and regeneration projects. We are helping to deliver transformational schemes by providing expertise at all stages of the planning, design and development lifecycle.”

Download the Shopping Centres Revisited 2024 report in full here →