Looking brighter: Savills forecasts key trends set to drive UK retail sector in 2018

21 September 2017

Improved retailer activity and confidence combined with an increase in rightsizing and the emergence of new occupier types all point towards a brighter future for the UK retail market, says Savills.  In its Retail Revolutions: 2018 Outlook report, the international real estate advisor forecasts a number of key trends that will gain traction in the sector next year.  These include:

Retailer activity to improve

Overall, this year has seen occupational demand stall as a result of Brexit and the subsequent operational costs generated.  As those cost pressures start to subside in 2018, Savills expects occupational demand and retailer confidence to improve, albeit this will be tentative initially, largely focussed on prime locations and likely to be less pronounced among US mid-market fashion brands.  

Rental growth will be subdued but improve post 2018

Though all UK rental growth is forecast to be relatively subdued in the short term, with average annual growth of 0.3% in 2017 and 2018, Savills expects this to rise to 1.4% per annum through to the end of 2021.  Destination retail locations in Central London and destination shopping centres in out of town locations are likely to see the strongest rental growth, says the firm, along with ‘convenience’ locations that demonstrate robust trading performance and with more affordable occupational costs.

Rightsizing picks up pace

Growing acceptance that there is perhaps too much floor space in the wrong locations will be a key trend in 2018, says Savills.  Rightsizing will not just extend to total provision but also to store sizes in some instances, with subdivision of larger units becoming more common in London and the South East. 

Shorter leases seen more favourably

The move to shorter leases is likely to become more entrenched, driven in part by the upcoming introduction of IFRS accounting standards in January 2019 that will bring all leases onto a company’s balance sheet.  Shorter leases will therefore become increasingly attractive to retailers as they will minimise liabilities.  However, Savills believes that a preference for longer terms will remain in prime retail locations.  The firm also believes that in certain locations and instances landlords will become more comfortable with shorter leases as they offer some operational advantages, particularly in shopping centres, such as providing greater flexibility around retailer mix.  

New types of retail occupiers and formats

Occupiers of retail space will become increasingly diverse, says Savills, highlighting manufacturing and car brands such as Dyson and Tesla which have already started to appear in high footfall locations including Oxford Street and Westfield.  This new generation of occupier is focussed on consumer engagement and brand awareness rather than simply direct sales.  Savills also expects that some traditionally out of town retailers will seek high street space for smaller concepts to reach a wider pool of consumers and drive online sales.

Marie Hickey, commercial research director at Savills, comments: “While this year has clearly been challenging for the UK retail sector, the outlook for 2018 looks brighter.  Many of the trends we expect to see emerge point to the beginnings of a return in retailer confidence and could also have a positive outcome for the longer term health of the sector as a whole.”

Sean Gillies, head of UK retail at Savills, adds: “Despite the uncertainty of the last 12 months, both consumer confidence and retail sales volumes remain well above their long term average in the UK.  Additionally, while the growth in online shopping has been a primary driver of the structural shift seen in the retail sector, physical stores continue to play a vital role in the total retail experience.  After the often referred to ‘perfect storm’ of 2017, tentative confidence is emerging as all the signs point towards a much more positive 2018.”

 
 

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Key Contacts

Marie Hickey

Marie Hickey

Director
Commercial Research

Savills Margaret Street

+44 (0) 20 3320 8288

 

Sean Gillies

Sean Gillies

Executive Director
Retail

Savills Margaret Street

+44 (0) 207 409 8159