United Kingdom

Once called a nation of shopkeepers, the UK has produced a number of iconic international retail brands including Harrods, Selfridges, Harvey Nicols, and Fortnum & Mason. The maturity of the retail market in the UK means that domestic and non-domestic retail operators are quick to adapt and implement new retail strategies and technologies in a bid to gain an advantage over competitors, creating a dynamic retail landscape.

As the capital of the UK, London offers many world class thoroughfares and shopping malls with high retail spend, while many prominent regional cities such as Birmingham, Manchester, Leeds, Liverpool, Edinburgh and Glasgow also offer strong footfall and significant spending power from both local and tourist shoppers.

The UK is one of the most sophisticated retail markets in the world and has an increasingly wide range of retail formats on offer. This includes a more recent trend for pop up stores to provide occupation and income from vacant retail units for landlords, and enabling innovative and unique new retailers and concept stores to establish a presence in the retail market. Events such as London Fashion Week, one of the world’s premier fashion events, ensures that the UK continues to be a world leading retail location. A well-advanced logistics and distribution infrastructure provides world-class support to retail companies. The UK has the benefit of a large number of international retail operators being well established within the retail offer, reflecting its long-standing trading history to all corners of the world and its relatively transparent property industry and legal system, which makes it a relatively straightforward market for international retailers to enter, often as a first point of international expansion.

 

 

ECONOMIC SUMMARY
ECONOMIC INDICATORS*20142015F2016F2017F2018F
GDP growth 2.82.62.82.72.5
Consumer spending 2.53.02.82.42.2
Industrial production 1.60.81.31.21.1
Investment 7.84.15.65.44.3
Unemployment rate (%) 3.12.32.12.12.0
Inflation 1.50.41.71.81.7
GB£/€ (average)1.21.41.41.41.4
GB£/US$ (average) 1.61.51.51.51.5
Interest rates 3-month (%) 0.50.50.91.41.9
Interest rates 10-year (%) 2.62.02.63.13.6

NOTE: *annual % growth rate unless otherwise indicated. E estimate F forecast

The growth in retail sales in the online and mail order channels has been much higher than the retail sector overall.  This is likely to continue.

ECONOMIC BREAKDOWN
Population 64.6 million (2014)
GDPUS$ 2,680.5 billion (2013)
Public sector balance -5.8% of GDP (2013)
Public sector debt87.2% of GDP (2013)
Current account balance-4.4% of GDP (2013)
Parliament Conservative
Head of State Queen Elizabeth II
Prime Minister David Cameron
Election date May 2020
RETAIL SALES GROWTH:
% CHANGE ON PREVIOUS YEAR
UNITED KINGDOM20142015F2016F2017F2018F
Retail Volume4.34.03.02.72.5
Retail Value4.02.63.33.23.0

LARGEST CITIES (2011)
CITYPOPULATION
London (Greater) 8,630,000
Birmingham (Greater) 2,284,093
Manchester (Greater) 2,244,931
Leeds (Greater) 1,499,465
Glasgow (Greater) 1,200,000
Newcastle-upon-Tyne 879,996
Liverpool816,216
Nottingham666,358

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London: 51.507335, -0.127683
Birmingham: 52.486243, -1.890401
Manchester: 53.479251, -2.247926
Leeds: 53.801279, -1.548567
Glasgow: 55.864237, -4.251806
Newcastle-upon-Tyne : 54.978252, -1.617780
Liverpool: 53.408371, -2.991573
Nottingham: 52.954770, -1.158086
Sheffield: 53.381129, -1.470085
Bristol: 51.454513, -2.587910

MAJOR UK FOOD RETAILERS

Tesco, J Sainsbury, Morrisons, Co-Operative Group, Marks & Spencer Simply Food, Waitrose

MAJOR INTERNATIONAL FOOD RETAILERS

Walmart-Asda, Aldi, Lidl

MAJOR UK non-FOOD RETAILERS

John Lewis, Marks & Spencer, Arcadia Group, New Look, Debenhams, Next, Boots, Argos, Homebase, B&Q

INTERNATIONAL RETAILERS IN THE UK

H&M, Gap, Inditex Group (Zara, Bershka, Pull & Bear Etc), Mango, Primark, Ikea, TK Maxx, Nike, Apple

FOOD AND BEVERAGE OPERATORS

Costa Coffee, Pret a Manger, Starbucks, Greggs, McDonalds, Burger King, KFC, Wagamama, Giraffe, Pizza Express, Ask Restaurants, Café Rouge, Bella Italia, Strada, Nando’s, Frankie and Benny’s, Chiquito, Wahaca, Byron, Joe & the Juice

TYPICAL HOURS
MONDAY - FRIDAY SATURDAYSUNDAY
09.00-18.00 09.00-20.00 10.00-16.00 stores over 280sqm,

Retail Scene

The UK is one of Europe’s largest markets with a population of more than 64 million and above average retail spend per capita. The UK is a mature and competitive retail market as well as one of the most innovative and dynamic, where consumers have traditionally been very receptive to new concepts and formats. The retail property sector is also a particularly sophisticated and transparent market, minimising the barriers to entry for new retailers seeking to expand or set up business in the UK.

The existing stock of shopping centre (over 5,000 sq.m) space in the UK totalled just over 17 million sq.m gross leaseable area as at 1st July 2015. The stock of shopping centre space in the UK is characterized by a relatively high number of large schemes, in comparison to other European markets. Schemes anchored by department stores, with catering and/or leisure elements in addition to a predominant retail offering, continue to be the dominant format.

The UK has one of the most developed retail warehousing markets in Europe. The market is active and has seen an increasing number of retailers entering the market from sectors such as fashion, sports goods and pet products over recent years. The supply of new space coming onto the market is very limited given planning restrictions.
The UK is also Europe’s most mature factory outlet centre market, which is an established part of the retail landscape.

E-commerce has developed more rapidly in the UK than in most other EU countries. The predominant contributing factors for this fast and widespread development of online retailing are the high levels of internet diffusion across the UK, along with an established culture for retail catalogue ordering, high levels of credit and debit card usage, and rising confidence in internet security. A more recent trend has been the rise of online retail purchases made through mobile devices, known as “M-commerce,” which now represents approximately 34% of total online sales in the UK.

While it is possible to enter the UK retail market directly, many retailers enter into franchises via concessions/shop-in-shops. In addition, the advanced online market makes it viable for new entrants, particularly in the fashion sector, to launch their brand with a strong web presence and a limited number of large flagship stores in key locations.

There are no restrictions on foreign companies either buying or renting property in the UK. It is generally believed that the UK lease structure is more orientated toward landlords than tenants, yet despite this, leases are becoming shorter with five year break options now more common in many locations. However, upward only rent reviews and full repairing and insuring obligations are still in force across the retail sector.

Although it is possible to take occupation of a new unit within a few weeks, it is more realistic to expect that on average it will take 6 to 9 months from initialising the property search to taking occupation of an existing property. This includes time for considering location options, the identification of buildings or sites, negotiating leasehold or freehold terms, and drafting of the appropriate legal documentation.

TOP SHOPPING CENTERS BY SIZE
NAMECITYSIZE (GLA SQM) YEAR OPENED
intu Metro CentreGateshead 189,400*1987
Westfield StratfordLondon 175,0002011
intu Trafford CentreGreater Manchester164,1001998
Westfield London London 161,500 2008
Liverpool One Liverpool 151,4002008
BluewaterDartford139,4001999
intu LakesideGrays133,2001990
Centre:MKMilton Keynes120,7501986
Arndale Centre Manchester 116,1001976
Meadowhall Sheffield 114,7001990
*Includes Metro Retail Park

NEW ENTRANTS TO THE MARKET

The Toy StoreKarl LagerfeldVictoria BeckhamLa PortegnaIRO
StradivariusBobbi BrownCarvenPhillip LimClub Monaco
BA&SHBerenice

KEY FEATURES OF LEASE
ITEMCOMMENT
Lease TermsTraditionally, UK leases have been for terms of 15-25 years and often can be higher, with 35 years often seen in parts of the retail market (such as for an anchor tenant). Leases are now more typically for 10 years. Break options were rare in the past but now are increasingly negotiable, with tenant’s 5-year break clauses now common. In the absence of a clear agreement in the lease, the tenant has no legal right to break so long as the landlord fulfils his obligations. Where agreed, breaks are typically at the first rent review for office and industrial space but are not currently for retail unless the lease term is over 15 years. The authorised use will depend on the terms of the lease which will also state the degree to which this may be varied by the tenant.
Rental PaymentRents are typically payable quarterly in advance, though monthly payments can be negotiated with landlords, who have been more flexible with rental payment terms since the downturn in 2009. Turnover/percentage rents are increasingly seen in shopping centres and common in specialist sectors such as factory outlets, hotels and airports. However, the recent rise of click-and-collect services have seen many landlords move away from turnover rents, since they are unable to capture online sales within the turnover rent. A security deposit is not normally required for a tenant with a strong covenant or where a parent company guarantee (or less frequently a bank guarantee) is provided. For weaker covenants a deposit may be required, by negotiation, with 6 months’ rent equivalent commonplace. Premium payments are common place in the retail market at times of rising rents and limited supply, with values boosted by the 5 year review pattern of rents.
Rent ReviewIndexation is not common practice but is being seen on an increasing basis, together with fixed uplifts, and can be particularly prevalent in the supermarket sector. The basis of rental review open market rental value every five years (upward only, even where rents generally have decreased).
Service Charges, Repairs and Insurance A service charge is usually payable in multi-tenanted buildings and covers management fees, security, cleaning, landscaping, internal maintenance of common parts, external maintenance and insurance, servicing of elevators, water, heating, air conditioning, management fees and property taxes. It excludes internal maintenance and insurance of rented accommodation, utility charges and VAT. The landlord is responsible for external/structural matters in shopping centres (charged back via service charge). The tenant is responsible for internal matters. The landlord usually insures the main structure and external fabric but will charge this back to the tenant. Insurance for common parts is also paid by the landlord and charged back to the tenant. The tenant usually pays for internal insurance directly.
Property Taxes and other costs The local government authority charge the "rates," the local property tax which is payable on commercial property (equating to approximately 40% of rent). The government sets rateable values in a 5 yearly review. A standard rate (the Uniform Business Rate or UBR) is applied to the rateable value in order to calculate the rates payable. This is set by government and may be subject to phasing allowances to reduce the impact of valuation changes and also by differing the rates for large and small businesses and empty properties. VAT at 20% can be charged on rental payments, but it is usually recoverable by most tenants (tax advice should be sought).
Disposal of a LeaseSub-letting is usually possible under the terms of the lease, subject to landlord’s approval. Assignment rights are not normally barred in the lease but will also be subject to consent, which should not be unreasonably withheld. Early termination is only by break clause; to be negotiated at outset of lease by mutual consent upon negotiation. At the lease end, the tenant is responsible for re-instating the premises to the same condition as at the start of the lease, subject to normal wear and tear. All tenant improvements must be approved by the landlord subject to the alteration covenant in the lease; approval should not be unreasonably withheld. Older leases may have Privity of Contract whereby all former lessees can be held liable for any default by a later tenant under the same lease. At lease end, the tenant is responsible for re-instating the premises to the same condition as at the start of the lease, subject to normal wear and tear.
Valuation MethodsShops are valued on a 'zoning' basis. The retail zoning principle recognises that the area at the front of the shop, adjacent to its primary window frontage (normally referred to as “Zone A”) is the most valuable in rental terms. The rate per square foot halves back through regular depths towards the rear of the ground floor, with “Zone B” valued at A/2, “Zone C” at A/4, “Zone D” at A/8 and a “Remainder” zone, typically valued at A/12. Upper and lower sales floors are similarly valued as a proportion of the “Zone A” rate, with basement and/or first floor sales accommodation typically taken at A/10, and ancillary at A/20. There will occasionally be local variations to these rates, which will also depend on the quality and functionality of the accommodation, relative to the market norm. For corner units with a double retail frontage, it is usual to add a small percentage to the value of the ground floor, the amount of which will depend on the degree of overall prominence of the retail frontage.
LegislationThe Landlord and Tenant Act, 1954, Part II (as amended) and subsequent acts is one of the pre-eminent pieces of legislation. Leases must be in writing and the lease document forms the standard documentation required. A formal deed is required for all leases over 3 years. A mandatory standard form of lease does not exist although a market standard is in place. There have been varying initiatives to simplify and shorten the lease, particularly to help smaller businesses.


United Kingdom Contacts

STUART MONCUR

Partner, National Retail Services
3rd Floor, 63A George Street
Edinburgh
Scotland, EH2 2JG
Tel: +44 (0)131 226 8754
Mob: +447887 795506