Retail real estate is back

Hidden beneath the slew of bad news about bricks and mortar retailers, from budget retailer, Poundland, to high street stalwart, WH Smith, investment interest in physical retail space is having a resurgence. 

Battered by e-commerce, magnified by the pandemic’s impact, and consumers stretched by the cost-of-living crisis, bricks and mortar retail has been sidelined by investors. 

However, some retail assets are now being added to portfolios. Investment in out-of-town retail properties in the first half of this year was 40% up on the same period in 2024. 

Away from urban fringes, good news is emerging from some city centre locations. The fortunes of luxury retail tenants such as LMVH, Prada and Chanel are soaring, positively impacting not only the UK’s leading high street, New Bond Street in London, but also rivals, Champs Elysee in Paris and Milan’s Via Monte Napoleone.

Luxury retail tenants are investing by purchasing their own premises. Earlier this year, Prada, which owns the Miu Miu brand, purchased Miu Miu’s flagship store on New Bond Street for £250 million from M&G Life Fund. Transactions by retailers on London’s top shopping street have reached £1.2 billion over the last five years, compared to only £100 million spent in the previous five years, according to CoStar.

What’s driving this resurgence? In the case of the luxury sector, its customer base is more insulated, resilient, and has a wide international spread.

Generally, first, interest rate cuts by the Bank of England have lowered the cost of capital, making retail assets more attractive. Second, although from a low base, consumer confidence has improved, buoyed by wage growth and stabilising inflation.  Some consumers want the whole retail experience, making it an event rather than being tied up indoors on their laptop or phone. This is particularly applicable to online clothes shopping, which has the added hassle of returns – an issue for both the consumer and retailer. 

Another positive development is the return of workers to offices, which has benefited retailers through increased foot traffic around business districts and main transportation hubs. 

Retailers are responding to the improving environment with renewed leasing activity, particularly in prime locations where vacancy rates are tightening.

The market is right-sizing after years of oversupply, and investors are now targeting quality over quantity. Assets with strong fundamentals—good location, tenant mix, and adaptability—are commanding premiums.

But headwinds are again gathering. Retailers are reeling from increasing labour costs as a result of the NI and minimum wage rises in the last budget, while the next budget will see tax increases, this time more likely to impact their wealthier customers. Adding to the mix will be losers from the next round of business rate reforms. 

The next few months will see if investment in bricks-and-mortar retail continues to gather momentum.