January 2017 Market Update - Prime Central London Retail Investment

As we start 2017, let’s take a look back at 2016, which was a strong year for the prime retail property investment asset class, particularly in Central London. Whilst a number of asset classes across the investment spectrum faced headwinds, volatility and uncertainty throughout 2016 – both pre and post the vote to leave the EU – the Central London retail market has held strong, offering investors a global safe haven.

Total investment volumes traded for Central London retail property in 2016 totalled £2.1 billion across 70 transactions against £3 billion in 2015 and £2.5 billion in 2014. Whilst volumes were down on previous years, in 2015 and 2014 we witnessed some particularly large transactions. On the ground, there is no let-up in investor appetite or indeed pricing being achieved in the market.

A large proportion (approximately £1.14 billion (67%)) of the total market volume in 2016 was weighted to six transactions on Oxford Street, with a further £299 million in three transactions on Bond Street, of which 71% (£1.03 billion) of this combined activity traded in the aftermath of the June 23rd EU referendum.

British Land sold the Oxford Street Debenhams department store in July for £400 million to a private European retailing dynasty. Also

in July Norges Bank Investment Management, in what has been described as near record breaking speed, purchased Boots’ flagship store at Sedley Place, 335-361 Oxford Street, within five days for a price of £124 million. Both transactions demonstrated the continuing depth and velocity of capital in the investor market in the wake of the EU Referendum.

In September, Oxford Properties and the luxury retailing group Richemont purchased Mulberry’s flagship store on New Bond Street from Aberdeen Asset Management for £198 million. More recently the Great Portland Estates development at the eastern end of Oxford Street, next to the new Elizabeth Line entrance on Dean Street, was sold to Norges Bank Investment Management for £276.5 million. The development is pre-let to Benetton and New Look.

Global currency fluctuations have presented attractive buying opportunities to foreign investors, particularly those from Europe and from US dollar denominated countries. Overseas investment accounted for 80% of the total volume traded in 2016, up from 65% in 2015. The predominant source of overseas money was from European investors, with Hong Kong private investors still very acquisitive for prime retail holdings.

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The weakening of the pound has also assisted in driving increased tourism, footfall and spend in the prime retailing destinations within London, although many of the luxury brands have been quick to start adjusting their prices.

The indicators for long term rental growth and resilience in London remain positive. Year-on-year footfall across the West End increased by 8.2% on average in the three weeks leading up to Christmas. London’s status as a retail powerhouse, coupled with currency deflation, has attracted droves of Chinese, American and UAE tourists keen to spend their cash. JLL expects demand from retailers to remain robust going into 2017 and 2018. For most international retailers, having a flagship store in London is critically important for brand positioning and exposure.

There are several headwinds gathering force as we enter into 2017 however. The business rates revaluation, which comes into effect in April, will result in a further rebalancing of the level of premiums paid in the market by retailers, and will impact on short term rental growth expectations as the overall occupancy cost for retailers becomes apparent, and occupational models recalibrate accordingly.

The rates revaluation may have a particular effect on the small, private independent businesses, which lack the scale and capacity to absorb the uplift in cost across a wider platform – often these retailers and restaurateurs are the ones bringing vitality and place making to a street/estate. It is important that landlords are sympathetic to these operators, in order to retain this unique heritage and point of difference in their wider London estates. However, there remains a ready supply of UK and international retailers keen to take stores in London. The opening of the Elizabeth Line in 2018 will further cement London as the No.1 investment, retailing and tourist destination in the world.

As we look forward to 2017, no doubt there will be a number of investors pondering what the prospects are for the UK and London property markets, with uncertainty surrounding Article 50, European political instability and ‘Trumponomics.’ However, as we witnessed in 2016, with uncertainty comes opportunity. The fundamentals of the prime central London retail property investment asset class remain strong, offering investors a safe haven status, and access to a highly transparent and liquid market.

The ‘success attributes’ of the UK’s capital city will continue to ensure that London remains a magnet for international capital, tourists and business visitors alike in 2017.

Contact

James Bramble Lead Director, JLL Central London Retail Investment james.bramble@eu.jll.com