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UBS: secondary UK shopping centres averaging 20% vacancy rates as polarised performance deepens

UBS reports that across the retail sector more broadly, vacancy is around 13.7% of units.

The picture is better in major cities, which have just 12.3% of units vacant. At the same time, medium towns have around 15.6% of shops empty, citing data from CBRE and JLL.

Sean Rymell, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:

“Ultimately, the UK has too much retail space considering the growth in online offerings. By the same token, retailers previously were thought to need around 200 shops to fully serve the UK, a figure of which is now thought to have come down significantly to possible low of 50. This means that even well-performing retailers are looking to reduce their store portfolios as many of the sites with lower sales volumes have now become surplus to requirements. As a result, development has largely reduced to nil and landlords have started looking to convert retail space to alternative uses.”

In the office sector, central London availability actually fell to 12.3 million sq ft in H1, which reflects an overall vacancy rate of 4.6%, according to UBS’ Real Estate Outlook report. Vacancy rates dropped in four out of the five submarkets with the West End being the only location to see a modest increase from 3.2% to 3.5% in the first six months of the year.

Zachary Gauge, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:

“The decline in vacancy rates can be attributed to the continuing steady flow of demand (albeit helped by continued expansion from serviced office operators). It can also be attributed to the relative lack of speculative office development in the near-time pipeline which will keep vacancy rates in check for the remainder of the year. With the market seemingly able to comfortably absorb the limited new development coming through we saw prime rental growth of 3.6% in the City and 2.4% in the West End in the first half of 2019. And, reflecting the resilience of the occupational market we have adjusted our forecast for average rental values from a minor decline in 2020 to a small increase in values, although we continue to expect prime rental growth to outperform.

“Prime rents were stable across all the regional markets in 1H19, but with tight supply conditions likely to persist for at least the short-term we would expect some upward movement over the short- to medium-term, with MSCI estimated rental values (ERV) following at a slower rate.”

The industrial sector has supply levels broadly in check, added UBS, although there has been a boost in development which has seen availability edge higher in the first half of 2019. “This has been fuelled by high levels of development, particularly in the South East and East Midlands,” addedRymell. “The majority of new supply is focused in the warehouse segment, above 100,000 sq ft in size. Industrial estates have seen much lower levels of development and as such are generally more dated and short in supply.”

UBS’ UK sector outlook will continue tomorrow.

james.wallace@realassetmedia.com