Market sentiment showed continuing improvement throughout 2024 for the retail warehousing market. This was in no small part driven by the strength and depth of the institutional buyer pool, and whilst transaction volumes at the start of the year were slightly more subdued, H2 saw a large swathe of demand, particularly from the mainstream UK institutions.

H2 2024 started with more than 15 active fund requirements, most of which were targeting the prime end of the market in the 5–6% yield range and the sweet spot in lot size being £20–30m. The majority of these requirements were satisfied for the year, with £3.50bn (119 deals) transacted in the sector compared to £1.937bn (76 deals) in 2023.

In fact, the market experienced the best Q3 in terms of trade volumes since before the GFC (2006), which was immediately followed by an exceptionally strong Q4, which also saw a notable uptick in assets coming to market with several completions and £1.32 bn of retail parks traded, two and a half times the amount traded in Q4 2023.

Nevertheless, there still remains some pent-up demand in the sector and, as a result, we expect more transactions to come forward throughout 2025, largely as a result of the renewed willingness of vendors to sell, underpinned by the rental growth being achieved occupationally, the falling cost of debt, and also the lack of ‘prime’ stock to keep up with ever-improving buyer demand.

Motivation for selling is a mixture of fund wind-downs as well as driven by those who were looking to exit a few years ago but found the conditions unsuitable (either because their asset required more asset management to secure the uptick in value or because they couldn’t achieve an acceptable price, as is the case now as vendors look to book a profit following the recent yield hardening).

Confidence in the retail warehousing investment market has therefore continued into Q1 2025, although there was a notable slowdown at the start of the year, with most institutions taking time to take stock and set their requirements for the year. Since January last year, we have seen 75 bps compression in our prime yields, and it is fair to say there was potentially a little bit of scepticism in that the market had perhaps overshot in terms of pricing improvements.

However, this has proved not to be the case with the deals that have been transacted in Q1 2025, and, therefore, the reason why the market is currently considered to be set fair, as it was at the end of Q4 last year. Since then, we have seen no further reduction in our Primary or Secondary yields. Savills prime yield currently stands at 5.25% for Open A1 schemes and 5.75% for restricted schemes. Prime yield improvement during 2024 was undoubtedly fuelled by the return of the institutional market, strength of the occupational market, low void rate, and rental growth.

The outlook for 2025 is predicated on an expectation that we will see a consolidation of those yields as opposed to further improvement. Higher bond yields and retailer cost issues post-Budget are acting as cautionary factors for buyers, and we are yet to see what effect the US tariff campaign will have on the market. However, it is likely that some buyers will put their searches on hold whilst the markets right themselves, likely to be more keenly felt in the poorer assets/locations with less focus on rental growth and more on rent continuity and alternative occupiers in the event of voids.

This suggests the sector is at the start of its recovery journey, with still some way to go before we see the convergence of primary and secondary yields, usually a sign of a market that is burgeoning.

The off-prime market is still very interest-rate driven, and disparity remains as to where they will be at year-end with the various macroeconomic factors at play. Despite the minimum wage, national insurance and business rate cost increases, and the US policy on tariffs, the common consensus amongst economists is a further 75 bps reduction in interest rates in 2025.

Nonetheless, perception is often more important, and it is arguably the market's thought on what will happen, rather than if it fully materialises, that will drive further interest in this market. This is why the appetite for retail warehousing remains stronger than it has in recent years. Q1 2025 was the best Q1 since 2022 for the sector, with c.£748m (22 deals) transacted, with more buyers looking to enter the market as we enter Q2.

The sale of Lakeside Retail Park in West Thurrock took place in late Q1, sold by Landsec to Farran. This represented one of the largest transactions in recent years at £114.00m (7.15% yield). Hines, meanwhile, completed the purchase of Junction 27 in Leeds in April, bought from Tritax for c.£53m at a yield of 6.50%. In addition, Hines also recently purchased Drakehouse Retail Park, Sheffield, from Sidra for £50.50m at a yield of 7.10%. 

Improving sentiment and appetite for the sector from debt markets will certainly assist and is a welcome and overdue occurrence. This obviously assists the debt buyers and will bring further entrants to this asset class. With voids low and static, having remained broadly stable even with the Carpetright and Homebase administrations, coupled with sustained occupier appetite and continued rental growth, occupationally conditions seldom get much better.

These fundamentals make potential income returns attractive, and the risks associated with the retail sector certainly less volatile – the lack of stock and ability for the sector to deliver further retail park development remains a strength of a sought-after sector.

Although the rationale for buying 18–24 months ago has changed (i.e. because the sector was underpriced and presented an opportunity to capture the capital appreciation), the market is still set fair, presenting buyers with a defensible income return strategy. With very little supply-side risk and a sector with predominantly strong retailer covenants, the opportunity to asset-manage a purchase and improve and enhance the scheme in order to capture rental growth is just as attractive as booking a profit through a sale later down the line.

That said, despite a market in the early stages of recovery where conditions are set fair, the uncertainty surrounding global economics, driven predominantly by US policy on tariffs, is resulting in a moment of reflection from both buyers and vendors as they assess any potential impact.

_{Read the articles within Spotlight: UK Retail Warehousing below.}