• Real Estate

London Calling? The outlook for retail property in London

In this piece Jonathan Bayfield outlines why we are positive on the outlook for London retail and how we can identify the London sub-markets with the best medium-term investment prospects.

Retail is experiencing major upheaval.

london street
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Both retail itself, and food & beverage occupier markets, are chronically weak in many parts of the country which is reflected in pricing and overall activity.

Much of this upheaval reflects the well-documented structural change resulting from the rise of online shopping. Sales, especially of low-engagement products, are being diverted from uninspiring physical stores to online delivery channels. As a result of this shifting dynamic, the most resilient physical stores will be those focused on high engagement experiential retailing. These stores will create a shopping experience that is rich, empowered and personalised and be crucial to the future multi-channel retailing landscape.

Not all markets will be equally equipped to deal with such a transition.  For example, scale is vital when looking to create a strong destination. Equally important are factors like:

•         The economic strength of a market’s catchment

•         Strong retail productivity

•         A good food and beverage offering

•         Alignment of the retail offer to catchment demographics

London appears particularly well-placed to deal with the structural changes underway. As a retail market, it clearly offers scale. And as an economy, it also offers exceptional dynamism. When compared to the rest of the UK, it also has a much higher concentration of younger and more affluent demographic groups1

And despite some political uncertainty, London’s economic out-performance is expected to continue in the coming years. According to Oxford Economics, growth in London is expected to run well ahead of the European average over the next ten years. And in a UK-wide context, growth in London is expected to be far ahead of any other region in the same period. As a result, population and spending power are set to become increasingly concentrated in the capital. This performance should buttress the advantages that London already has when it comes to creating destinations for high-engagement experiential retailing.

Figure 1. London’s forecast performance compared to the rest of the UK, 10 year (2019-2028) Average growth per year

Yet London is not a single retail market. The UK's capital encompasses a host of centres with a wide range of characteristics ranging from the very large, nationally or even internationally-prominent centres to smaller sub-markets with a more local catchment and character dynamics. Not all these sub-markets are equally well placed to become destinations for high-engagement, experiential retailing. 

Online redefining shopping

Although the period since the GFC has seen some retail-specific headwinds that may well be cyclical (such as sterling weakness and declining real incomes), the structural change due to the rise of online shopping has been clear for all to see. Data from the Office for National Statistics (ONS) shows that online sales as a proportion of all sales (excluding fuel) exceeded 20 per cent for the first time in November 2018; in 2008 the share was less than five per cent2.

Yet even numbers as pronounced as these do not capture how the maturing of online retailing has altered the very nature of the shopping experience. Online shopping can help eliminate many of the customers’ costs as well as the challenges related to shopping in physical stores. Transport and time costs, queuing, difficulties locating products and lack of in-store assistance are all good examples of this. However, the trend toward online has also introduced and popularised new features such as customer reviews, price matching, instant customer support, fast returns, order tracking and multiple shipping options.

These developments have significantly changed consumers’ expectations around their shopping experience by raising the bar in terms of convenience, personalisation, service and choice. Yet they do not affect all product types equally. It is important to distinguish between two classes of products: low and high engagement. 

Low-engagement products, or those with a low “mind share” are typically routine purchases where speed, efficiency and price are the chief concerns. For these, there will be a greatly reduced role for physical stores as “autoreplenishment” and “direct-to-consumer” retailing becomes the norm.

By contrast, high-engagement products offer the potential for an interactive, tactile and personalised customer experience. The fate of physical stores is especially tied to these products, that offer outlets the potential to be a space for discovery, engagement, experience and interaction with brands. These stores will no longer simply provide a distribution channel but will aim to create an experience that is rich, empowered and personalised. Ideally, they will create an experience that rivals or surpasses what buyers can get online.  Stores will be used as the physical interface in a seamless multi-channel experience. 

But only some markets are likely to be able to reinvent themselves as destinations for high-engagement, experiential retailing. In particular, scale is vital when looking to create a strong destination and this suggests that the major cities and regional centres offer the greatest potential. By contrast, smaller centres are likely to struggle to establish themselves as destinations for high-engagement retailing.

Scale alone is not likely to be sufficient, however. Additional necessary factors include the economic strength of a market’s catchment, strong retail productivity, a good food and beverage offer and the alignment of the retail offer to catchment demographics.

Markets with these attributes are likely to be resilient in the face of rising online sales. Identifying such markets allows us to focus portfolios on growth locations and manage the risks inherent in a period of major upheaval3.

The unique appeal of London

London’s scale is undeniable, particularly as a retail market. As an economy, it also offers exceptional dynamism. According to Oxford Economics, London has been by far the fastest growing UK region in recent years. Its average GDP growth has been almost twice that of the rest of the country in the period since 2008. Europe's busiest high street, Oxford Street, has a catchment that extends far beyond municipal and physical boundaries of the city.

This fits with a trend in many developed economies over recent decades whereby the largest cities within a country have tended to strongly out-perform smaller centres4. This appears to be a consequence of economic globalisation, the digital revolution and the rise of the knowledge-intensive service economy in the developed world.

London’s credentials and scale as a centre for talent and knowledge-intensive industries are remarkable not just on a UK-wide comparison but at a European and global level too.

From having the highest percentage of residents with tertiary educational attainment in Europe, at over 55 per cent5, as well as the greatest number of highly-ranked universities6 and business schools of any European city. With four million workers speaking over 230 languages, 318,000 of them in digital tech jobs, and 400,000 creatives it has one of the most diverse and talented workforces in the world.

These strengths in human capital underpin London’s major concentrations in a broad range of knowledge-intensive sectors.

Evidence shows that cities with the most prosperous economies have significantly more office space in their city centres, and as a result stronger retail and leisure environments7 Enhancing the quantity of people with high disposable incomes living and working in city centres, is the most sustainable strategy to keep retail sales resilient. It is a much more efficient strategy than giving tax relief on business rates or incentivising consumers to visit with initiatives such as free parking8.

An additional boost to London’s economic performance comes from its position as one of the world’s great tourist destinations. London played host to over 19.8m international visitors in 2017 making it the second most visited city globally9. The retail sector is particularly boosted by tourist visits, with those from the Middle East and China especially important in terms of share of transactions. It is estimated that 30 per cent of retail expenditure in the prime West End streets comes from international tourists with luxury goods sales particularly supported10.

What is more, it has a relatively young and wealthy population. While international visitors provide a very welcome boost to London’s retail scene, of even greater importance is the financial strength of many of its permanent residents. Compared to the rest of the UK, London has a much higher concentration of younger and more affluent demographic groups.

These demographics lead to behavioural differences on the part of London shoppers. Londoners visit the shops more often than average, for instance. They also spend far more on dining out than residents of other UK regions. These characteristics are a boon for the capital’s retail scene when it comes to creating destinations for high-engagement, experiential retailing.

Sorting the wheat from the chaff

More than 200 retail centres can be identified in the Greater London area. These range from the very large, nationally or even internationally prominent centres to smaller sub-markets with a more local catchment and character. 

In order to identify which London markets are most suited to that transition and therefore most resilient to structural change, we have divided the sub-markets into a number of categories based on size and other quantitative and qualitative characteristics.  

The first category comprises the very large and established London centres. These share characteristics such as a very large catchment, highly productive centres, and retail offers that are well aligned to their catchments and elevated purchasing power. Examples are the West End, Covent Garden, Kingston and the Westfield shopping centres. These markets are expected to continue to perform strongly in coming years. They should offer the most robust investment performance. They are growth locations and are on many investors’ radars. In our view, these are very desirable locations for investment, though competition for assets in these centres tends to be intense.

Unsurprisingly in a metropolitan area comprising almost 10m people, there are major disparities across London in terms of affluence and the economic strength of the catchment, as well as the retail offering. For instance, CACI’s11 analysis shows that, as well as its over-representation of more affluent demographic groups, London’s population also includes a disproportionate share of low-income families. These comprise 23 per cent of London’s population compared to just seven per cent nationwide.

Therefore, detailed local-level analysis is needed to identify the most promising markets. Economically, these will have an affluent catchment and expected healthy borough-level growth. In addition, they will have an attractive retail offering.

Quantitative analysis can be used as a screen to eliminate centres that do not offer these advantages. Local socio-economic demographic indicators and forecasts of borough-level growth are readily available. Analysis of the retail offering seeks to identify centres with high retailer productivity12, low exposure to online retailing and a retail offer that is aligned to its catchment. Macro analysis can rapidly eliminate the weakest markets. However, further micro-level analysis is necessary to identify those centres with the greatest potential to flourish as retail destinations in the current environment. The best centres will demonstrate a number of the following characteristics:

•         Pleasant environment and public realm

•         A plentiful food and beverage offering

•         Strong tenant line up

•         Variety of unit sizes

•         Public and private sector investment

•         Strong connectivity

Strategic Implications

Real estate investors who generate outsized returns are patient and disciplined with their convictions. We will seek to build positions over the medium to long term in the London retail sub-markets that demonstrate strong credentials as we have a high degree of confidence in the indicators we have identified.

London should continue to out-perform the wider UK retail market and looks particularly well placed to deal with the structural changes unfolding in the retail sector. There will be winners and losers in the capital. Not all of London’s sub-markets are equally well placed to flourish as destinations for high-engagement, experiential retailing. Investment needs to be patient as well as tightly-focused on the most resilient submarkets.


  1. https://www.caci.co.uk/blog/ who-are-londoners-and-how-do- they-shop.
  2. “Retail Sales, Great Britain: November 2018”, Office for National Statistics
  3. https://www.avivainvestors.com/ en-gb/views/aiq-investmentthinking/2017/10/retail-real-estatefuture/
  4. https://www.avivainvestors.com/en-gb/ views/aiq-investment-thinking/2018/05/ real-estate-the-rise-of-the-metropoles/
  5. https://www.avivainvestors.com/en-gb/ views/aiq-investment-thinking/2018/05/ real-estate-the-rise-of-the-metropoles/
  6. https://www.topuniversities.com/ qs-world-university-rankings
  7. JLL City Momentum Index 2018 Centre for Cities 2018 Building Blocks report
  8. Centre for Cities Building  Blocks report
  9. Mastercard’s 2018 Global Destination Cities Index
  10. Central London Retail Report, Spring 2017, BNP Paribas Real Estate.
  11. https://www.caci.co.uk/blog/ who-are-londoners-and-how-do-they-shop
  12. Javelin Group Retail Strategy Consultants. This is determined by looking at retailer store-level sales figures for different centres with the most productive locations likely to enjoy advantages such as high levels of footfall and extended trading hours

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