Secondary suffers as shoppers, retailers and investors focus on prime

The impact of constrained public spending in the UK has led to real estate investors battling over the slim supply of prime retail assets and struggling retailers narrowing their focus to fewer locations where footfall remains strong, according to property adviser DTZ.

DTZ's Q2 Retail Investment Market research underlines how secondary assets are finding it difficult to compete for investment attention, although more assets are expected to come into the market as banks step up their workout processes. The downward spiral for secondary will, the report suggests, be intensified as administrations and downsizing by retailers drive up vacancy rates in weaker locations. This results in secondary high street and shopping centre yields continuing to move upwards.

DTZ said that institutional investors continued to take the lead in Q2 in shopping centre, high street and retail warehouse transactions. However, in the face of weakened occupational demand, retailer administrations and widespread downsizing, their focus was on prime, and appetite for riskier secondary assets remained low.

Prime equity investors are taking an interest in assets with potential for repositioning, on receipt of adequate cap expenditure and suitable asset management. But pricing is an issue.

With banks stepping up their workouts, and institutions avoiding non-core properties, secondary high street stock saw yields continue to shift outwards in Q2. As retailers carry on narrowing their focus to prime locations where footfall remains high, and with trading conditions unlikely to improve over the next quarter, secondary high-streets and shopping centres will have to contend with increasing vacancy rates as occupational demand continues to fall.

Martin Davis, head of UK Markets Research at DTZ, commented: 'The decline in consumer spending and disposable income is impacting the occupational market and putting pressure on rents payable. Ailing retailers looking to downsize are likely to retain their prime locations because they will bring in more money - despite the higher rents. Retailers will be able to justify the rental costs because consumer spending in these prime locations is so resilient. As a result, the rental growth performance of secondary retail assets is deteriorating compared to prime.'