By Calum Bruce, investment director at Ediston Property Investment Company.
Sometimes it takes a crisis to show how the land really lies. Prior to the pandemic, the retail sector was faltering, and the death of the high street was on everyone’s lips.
Although all retail sectors were hit hard by lockdown, retail parks came through it in much better shape than the traditional high street. Vacancies were relatively low, many retail park tenants remained open even at the height of lockdown, and footfall recovered quickly. Now, the outlook for the sector is increasingly bright.
Before Covid-19 struck, we already had a strong preference for retail warehousing, with about 70% of assets invested in the space. The past two years have only cemented our conviction. We have increased our exposure to 98%, and we are now moving towards full investment in retail parks.
For most of us, life is very different than it was in 2019. Working from home has had an impact on many aspects of our lives, including how and where we shop. In today’s world, convenience is king. This does not just mean getting things delivered to our door, but also the ability to go shopping where there is easy access, plenty of parking and a wider range of outlets. Out-of-town retail parks fit the bill.
Indeed, e-commerce is not the whole story. Rather than online-only, the ‘omnichannel’ model is emerging as the mode of shopping of choice. Omnichannel shopping essentially combines online and offline sales for a fuller customer experience. Many of us are already familiar with its most common manifestation – click and collect – where the customer orders online but picks up in store.
Growth from click and collect is outstripping pure online sales. This is because customers like to verify what they have bought, which at the same time allows retailers to make supplementary sales. According to industry reports, about 40% of click-and-collect customers make an additional purchase when they pick up their online order – or return it. And for both parties, click and collect is a more economic option than online delivery, as there are no postage costs involved.
Retail warehouses reign
Retail parks offer convenience to the customer, but they are better for retailers too. In contrast to high street stores and city centre malls, retail warehouses offer more – and adaptable – space at considerably lower rents. They also provide a hub for ‘last-mile’ deliveries. As home deliveries surged during the pandemic, many companies struggled to cover the cost. But with abundant space and logistically advantageous locations, retail warehouses make online sales possible.
In addition, out-of-town retail park are ideal for the omnichannel approach that looks set to thrive in the ‘new normal’. Here, bricks and clicks are not in competition but working together to improve the consumer experience.
Compared to pure e-commerce, which only requires warehouse space, clicks and bricks requires physical premises, not only for storage and dispatch, but also for pick-up and returns. For retailers, the flexible retail warehouse format allows outlets to combine the functions of a shop, distribution hub and storage depot.
With relatively low vacancies, a rebound in footfall and a rapidly improving outlook, retail warehouses have come through the pandemic in a robust shape. A good example is the park we built during the pandemic, which has been up and running since July 2021. Haddington Retail Park is located 15 miles from Edinburgh and is the only retail park serving the area. It is now 97% let, with tenants including Aldi, Home Bargains, The Food Warehouse and Costa Coffee. In less than a year of being open, the new park has done exactly what we intended it to do – deliver income and value to investors.
For property investors, retail parks offer a whole host of attractions. These include strong tenant demand, inflation protection and impressive yields. Given the recent rise in prices, inflation protection is a crucial consideration for investors. Commercial property is not a panacea for inflation, but rents will eventually rise in response. Retail parks also offer tenants much more flexibility to adapt to changing conditions.
By concentrating on retail warehouses, EPIC harnesses all of these attractions. In a yield-starved world, its current 6.3%* dividend offers a compelling level of income, and the dividend is fully covered and paid monthly – with scope for increases as conditions normalise.
But not all parks are equal. At EPIC, we take a highly selective approach. We are only interested in what we consider to be the best parks, let at affordable rents, with dominant positions in the best locations. Our retail warehouse portfolio has come through the pandemic in good shape, and it is well placed to continue delivering for our clients as economic conditions improve. With our fully covered dividend, there is a compelling case for investors to choose EPIC for income, as it is now the specialist retail-warehouse REIT.