With five sub-sectors currently exhibiting downward pressure and seven recording lower yields versus 12 months ago, there is evidence of increasing investor appetite; however, will escalating conflict in the Middle East throw a spanner in the works?
Tempered optimism
In June, average prime yields for UK property remained stable, holding at 5.91% for the fourth consecutive month. With five sub-sectors currently exhibiting downward pressure and seven recording lower yields versus 12 months ago, there is evidence of increasing investor appetite for prime commercial property and an expectation of further inward movements of the average prime yield during the next few quarters.
The UK’s occupational property market continues to show resilience, with rental growth underpinned by a subdued development pipeline and sustained occupier demand. These fundamentals are expected to bolster investor sentiment further, particularly as interest rate cuts anticipated later this year may enhance credit conditions, improve debt availability, and support higher loan-to-value ratios.
However, an escalation of the conflict in the Middle East could throw a spanner in the works and fuel deeper investor caution, on top of that witnessed following President Trump’s global tariff policy announcement, by exposing the UK’s vulnerabilities to energy shocks and global trade volatility.
Deepening tensions may push UK inflation further above the Bank of England (BOE) target of 2%. Currently, CPI stands at 3.4% and in its latest meeting, its Monetary Policy Committee chose to hold interest rates at 4.25% to maintain a “gradual and careful” approach amid persistent inflation, global trade tensions, and heightened geopolitical uncertainty.
Out-of-town grocery openings remain well below the annual long-term average but are dominated by the expansion of the market’s value-oriented operators
Aldi, Lidl and Iceland/Food Warehouse were among the most acquisitive operators in the out-of-town market in 2024. All three grocers were in the top ten in terms of new lettings, opening 14, 11, and 11 new stores, respectively. 2025 has continued in the same vein, with Lidl opening 12 stores, Aldi 5, and Iceland/Food Warehouse 4 in the year to date. This sustained activity underscores the strong appeal of retail warehouse locations among value-focused grocers. In fact, 86% of last year’s 43 new foodstore openings in the sector came from value-oriented or discount-led operators.
So far this year, we have already seen the same number of new grocery lettings overall as we saw in the entirety of last year, as Aldi, Lidl, Iceland, and Farmfoods intensify their growth strategies. The elevated uptick in new lettings signals strong demand and reflects how value-driven grocery operators have capitalised on recent insolvencies, particularly the Carpetright and Homebase administrations, which have released a limited number of new lettings to the market. Notably, close to two-thirds of these newly acquired grocery units have been occupied by discount-focused brands.
However, the overall number of new grocery openings remains well below the long-term average, revealing a disconnect between retailer ambition and site availability. The constraint lies not in demand, but in supply: the retail warehouse market faces minimal development and a declining vacancy rate – now at just 4.7% – leaving expansion-minded grocers with few opportunities to execute their growth strategies.
Poundland insolvency-driven closures will do little to satisfy demand for new letting in the retail warehouse market
2025 Q1 take-up figures in the out-of-town market have seen above-average new lettings as a number of acquisitive retailers have clamoured for opportunities made available through last year’s Carpetright and Homebase administrations. With the majority of those stores now accounted for, and vacancy back where it started at 4.7%, this level of take-up will not continue to year-end without further insolvency activity.
This highlights the strong appetite for new lettings and the speed at which occupiers are willing to move when space becomes available on coveted retail parks and in undersupplied catchments. The Poundland CVA will only see c.50 units come back on the OTR market (approximately 500,000 sq ft), which will only increase vacancy across the sector marginally to 4.8% – not enough to satisfy the appetite demonstrated in Q1 take-up. This represents 23% of Poundland stores either immediately earmarked for closure or likely to close following a 100% rent reduction.
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