Amid grim headlines about high-street closures, it’s easy to be pessimistic towards UK retailers. But the prospects for different retail sub-sectors vary widely. We believe that retail warehousing offers investors an attractive way of harnessing the trends that are transforming the high street. 
Since its origins in the 1980s, retail warehousing has evolved significantly. Initially, most out-of-town retailers sold bulky goods like fridges and dishwashers, from stand-alone units. The next phase saw retail parks evolve, anchored by DIY or bulky goods tenants. Then, in the late 1990s, the line-ups softened, and shopping parks emerged as fashion stores got in on the act, attracted by the greater floorspace on offer.
In the run-up to the 2007/8 financial crisis, several companies expanded on very cheap debt and were paying sizeable rents. As the crisis erupted, those rents looked very expensive. Retailers with long leases were caught out, and vacancy rates rose. When retailers began to return to retail parks in the wake of the crisis, they were much more cautious in their approach.
Today, retail-park tenants focus on flexibility and affordability. They prefer smaller unit sizes to the ‘big boxes’ of the past. And retail parks have a much more diverse mix of tenants. Besides bulky and discount goods, retail parks now offer ‘the high street out of town’, complete with coffee shops, cinemas and casual dining. For many consumers, shopping at a retail park has become a family day out.
Crucially, out-of-town parks offer retailers clear advantages over the alternatives. High-street shopping centres have expensive rents and limited parking. They also entail costly service charges. And there’s simply not enough spending to keep them all in business.
Most of these problems also apply to traditional high-street stores. Additionally, department stores are often split over several levels in old buildings that are expensive to maintain. And many tenants are struggling after shackling themselves into multi-decade leases. It’s easy to blame greedy landlords, but these retailers had a choice when they opted for inflexible long-term arrangements.
In contrast, retail warehouses offer considerable flexibility. Large units can be divided, and smaller ones combined as tenant requirements change. Spaces can be rapidly reconfigured. That flexibility is vital in a period in which retail habits are changing fast.
And despite this rapid evolution, a physical location is still a necessity for most retailers. Buyers of bulky goods need to see their purchases up close before they commit. And it’s simply not cost-efficient for retailers to rely on an online-only model, given the cost of home deliveries and returns. More generally, it’s clear that customers prefer to see and touch what they’re buying. Recent research by experts indicates that the penetration of online shopping for all retail will slow, and plateau at 19 per cent by 2022. But the key question is how that site interacts with the online world.
That’s another crucial advantage of out-of-town retail parks: their embrace of the internet. Retailers used to see ‘bricks ‘n’ clicks’ as the solution. Today, though, that concept has evolved into being ‘omnichannel’. That means not only having both online and bricks-and-mortar stores, but combining online shopping, physical shops, click and collect, home delivery and a location for returns into a seamless shopping experience.
‘Omnichannel’ has real advantages for retailers. Research shows that most people who pick up an online purchase in-store buy something else too. The same is true when they return goods. So, for a purchase that involves some returns, retailers are getting three opportunities: the initial sale, an in-store purchase on collection and then a third purchase when some goods are returned or exchanged. Customers also have the convenience of trying on clothes in store before taking them away.
All that plays to the strengths of retail warehousing. An out-of-town retail park offers the best location for combining all the elements that omnichannel requires: the space for storage and display; parking for customers’ cars and delivery vans; and the opportunity to tempt customers with fuller product ranges than can be displayed on the high street. Most importantly, retail warehouses are cheap.
Companies are acknowledging these advantages. For example, Marks & Spencer has been attracting headlines as it closes city-centre stores. But it’s been opening stores in retail parks. We expect this pattern to become more widespread as high-street stalwarts embrace the omnichannel approach. And as omnichannel becomes omnipresent, investors who have anticipated this trend will stand to benefit.
Of course, there have been some high-profile failures among retail-park tenants. But Toys R Us and Maplin failed not because of their location, but because they didn’t adapt to change. Toys R Us didn’t offer the children’s experience that its rivals did, while Maplin was slow to adopt the online/offline model.
There are always casualties during periods of change. But behind the gloomy headlines, many retailers are adjusting to the new environment. The retail landscape is certainly changing, but for those that embrace the change, the opportunities are considerable.
Calum Bruce is manager of Ediston Property Investment Company. The views expressed above are his own and should not be taken as investment advice.