By Steve McGrath
LONDON—British Land /zigman2/quotes/210491538/delayed UK:BLND +3.85% PLC, one of the U.K.'s biggest retail-space landlords, on Tuesday said there are signs that renewed demand from large retailers is pushing up rents in the sector after many companies put their expansion plans on hold during the financial crisis and resulting economic downturn.
However, the recovery is restricted to the prime retail property sector such as out-of-town retail parks, and not town-center properties, which remain mired in a downturn.
"Retailers are taking a longer-term view. They've decided they need new space to drive sales long-term and they're looking to be in the best locations," British Land Chief Executive Chris Grigg said.
The retail sector has struggled during the economic downturn, and many smaller retailers have gone out of business, unable to offset a drop in consumer spending. However, large retailers like the national supermarket chains have continued to perform well. That has created a widening difference between retail-property values and rents in prime out-of-town and edge-of-town shopping locations where the large chains are located, and values and rents in the U.K.'s high streets.
Several large retail chains, including all the major U.K. supermarket chains, have set out plans to expand in the coming year as they try to drive growth amid a competitive retailing environment that's making it difficult to derive any substantial growth at existing stores.
William Morrison Supermarkets PLC, which currently has most of its stores in the north of England, is expanding southwards; J Sainsbury PLC is adding more nonfood and convenience store space; and Wal-Mart Inc. /zigman2/quotes/207374728/composite WMT +1.00% 's Asda is integrating its Netto store purchase and opening more smaller store formats. Tesco PLC, British Land's largest retail client and the U.K.'s largest supermarket chain, is stepping up the pace of its store rollout in fiscal 2011, after adding two million square feet in fiscal 2010.
Nonfood retailers including fashion chains New Look, Next PLC and Arcadia Group and baby product retailer Mothercare /zigman2/quotes/207161689/composite MTC -3.45% PLC all let more British Land space to expand existing formats in the three months to Sept. 30, according to the landlord, while U.S.-based electronics retailer Best Buy /zigman2/quotes/205918291/composite BBY +0.61% Co. Inc. led new lettings of British Land's out-of-town space. Best Buy has a new joint venture with Carphone Warehouse Group PLC in the U.K. and has ambitious plans to increase the number out-of-town stores it runs, from six currently.
"In a number of our retail schemes, we saw good demand from leading retailers including Best Buy, H&M, New Look and Next /zigman2/quotes/202538478/delayed JP:2120 +1.91% ," British Land said. "Overall we agreed new lettings and renewals on nearly 500,000 square foot of space, 80% of which were on long-term leases."
Mr. Grigg highlighted a deal to let 47,000 square feet of space to the U.S.-based electronics retailer Best Buy /zigman2/quotes/205918291/composite BBY +0.61% Co., which is making a push into the U.K. He said the site, in Rotherham, Yorkshire, was an example of a retailer seeking prime locations—the site offers good access, a strong combination of retailers to attract shoppers to the park and a dominant location in that part of the country.
The company's retail tenants include some of the U.K.'s largest retailers, including grocers Tesco,Sainsbury /zigman2/quotes/206038250/delayed UK:SBRY +2.95% , department store operator Debenhams PLC and home improvement stores Homebase, owned by Home Retail Group /zigman2/quotes/221810778/delayed UK:HOME 0.00% PLC and B&Q, owned by Kingfisher /zigman2/quotes/200571451/delayed UK:KGF +1.61% PLC. About 65% of its current portfolio is in retail, and 85% of that it considers to be prime out-of-town sites.
The company said aggregated estimated rental value—the open market rent that a property can be reasonably expected to attain given its characteristics, position and market conditions—rose 0.1% in the three months to Sept. 30.
British Land said it is progressing over 850,000 square feet of new retail developments to take advantage of the shortage of prime retail space supply, renewed demand and rising rents. It is additionally already committed to four superstore extensions and the building of a second phase of a retail scheme in Zaragoza, Spain.
Last week, Land Securities /zigman2/quotes/207145631/delayed UK:LAND +4.49% PLC said it had commenced selective retail developments, but only when they are supported by pre-letting by retailers, reflecting its continuing caution over the sector. "We see further opportunities in this area, particularly in edge-of-town locations targeted by supermarkets and other retailers," it said, echoing British Land's comments.
British Land Tuesday joined other U.K. real-estate investment trusts in reporting higher net asset value per share, driven by higher property valuations and improving rents.
The company, which owns a mix of retail and office developments, echoed peers in reporting a good recovery in both values and rents in the London office market, a recovery it expects to continue as a continued shortage of supply combines with a large number of lease expirations over the next three years.
Write to Steve McGrath at email@example.com