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CPA: Retail

Investor returns on retail property have been weaker over the last three years than for office and industrial property assets, and the sector has endured the sharpest falls in capital values in recent months.

This relative under-performance of the sector reflects investor concerns over the demand for retail space and the future pace of rental growth.

Nevertheless, construction output on retail projects increased in 2007 on the back of strong new orders during 2006 and the development of some major schemes such as those at White City and in Bristol. As a result, considerably more floorspace will come on stream in 2008 and 2009.

In addition, CB Richard Ellis reports that the volume of retail warehouse projects in the development pipeline is continuing to decline, while new planning restrictions are limiting the scope for upgrading existing premises by installing mezzanine floors to boost floorspace and increase their appeal to traditional high street retailers.

Looking ahead, consumer spending is likely to grow below trend over the next two years as rising mortgage and energy costs erode household discretionary income.

Added to this, a quieter housing market and lower mortgage equity withdrawal are likely to have a knock-on effect on consumer spending on big ticket items and housing related spending.

As a result, the increased construction output on retail projects in 2007 is likely to give way to a more subdued outlook for the next three years, reflecting greater investor caution and the absence of new schemes starting on site.

Beyond 2010, on the back of a rebound of economic growth and consumer expenditure, demand for retail premises is expected to increase modestly in both 2011 and 2012.