The Retail Note - Retail in 2026: Retaining the Crown

Key Messages

• Retail consolidates position as the best performing property asset class in 2025
• All Retail achieved a total return of 9.6% in 2025…
• …vs 6.6% for All Property (9.1% for Industrial, 5.0% for Offices)
• Shopping Centres and Foodstores (both 10.2%) edge Retail Warehousing (9.8%)
• Outperformance underpinned by a ‘holy trinity’ of:
  • capital growth (+3.3%)
  • income return (+5.8%)
  • rental growth (+3.5%)
• Rental growth at highest level since 2006
• Occupational market strongest in over a decade
• National vacancy rates likely to return to pre-COVID (12.4%) levels in 2026
• 2025 total retail investment volumes reached £5.83bn
• Down -17% on 2024 and -8% lower than the 10 year average
• Investment underperformance largely supply-driven (esp. Shopping Centres)
• Retail Warehousing accounted for 42% of volumes
• A brisk start to the year, but a slow end for RWH
• 2026 will inevitably be another challenging year on the macro-economic front
• UK GDP is forecast to grow by just +0.9% in 2026 (2025f: +1.4%)
• CPI forecast to fall (to 2.8%), but still above 2% target
• Two further -25bps cuts in interest rates likely in 2026
• Retail real estate will continue to outperform
• All Retail forecast to achieve total returns of 9.5% in 2026
• All sub-sectors delivering (Foodstores 10.4%, SCs 9.5%, RWH 9.3%, HS 9.0%)
• Some occupational pinch-points in April:
  • increases in minimum wage
  • business rates revaluations
• Retail investment volumes are likely to improve significantly in 2026
• All sub-sectors (except RWH) saw considerable momentum build during 2025
• A number of ‘big ticket’ shopping centre deals were completed at the tail end of 2025...
• …with a whole host more waiting patiently in the wings for 2026.

Ring out the old, ring in the new. In a nutshell:

In 2025, Retail defied anaemic (at best) macro-economic growth and retained its crown as the top performing real estate asset class (with shopping centres surprisingly edging retail warehousing). Despite many ongoing and new challenges, retail occupier markets are arguably in their best state for over a decade. But this fundamental strength has yet to filter fully through to investment markets, which remain more susceptible to macro-economic and geopolitical setbacks, shockwaves and shenanigans.

More of the same in 2026. A lackluster (at best) macro-economic outlook, but retail property will continue to outperform. Ongoing resilience in retail occupier markets, despite mounting cost pressures. But a key difference on last year in the shape of a far more buoyant retail property investment market, spearheaded by a host of ‘big ticket’ shopping centre transactions.

2025 – the year that was

Occupational Stability

We firmly believe that Retail occupier markets are in better shape now than they have been in over a decade. There is currently a virtuous circle of limited occupier distress, declining vacancy rates, measured but sustainable rental growth and renewed investment in physical space by a number of key retail operators.

Occupier Distress

The Centre for Retail Research reported that 54 businesses ‘failed’ in the first 10 months of 2025, an apparent uptick on just 34 ‘failures’ in 2024. However, the number of ‘stores affected’ (2025 YTD: 3,080) was only around half that of last year (2024: 7,537), reflecting the fact the distress has been disproportionately concentrated amongst small players, independents and non-store operators (e.g. online pure-plays). If anything, in my opinion, these figures significantly over-state the level of distress.

The largest corporate ‘failures’ in 2025 were Claire’s Accessories (306 stores), Bodycare (150) and Poundland (805). However, all three businesses will live on in a streamlined form. Claire’s became the latest retail acquisition for private equity firm Modella Capital. All Bodycare’s stores were initially closed as part of the administration, before an investment group fronted by former Molton Brown and The Body Shop CEO Charles Denton acquired the brand and intellectual property. Poundland was sold to Gordon Brothers for £1 and plans are afoot to reduce the estate to 650 - 700 sites. Restructuring rather than outright failure.

Vacancy Rates

While occupier demand is far from rampant, most retailers continue to acquire selectively, either through new sites or strategic relocations. The gap between store closures and new store openings continues to narrow and is now close to equilibrium. A much healthier position than we have seen for some time.

Accordingly, Retail vacancy rates continue to trend down, albeit painfully slowly (c.-10bps per quarter). In Q3 2025, the national vacancy rate stood at 13.5%, the lowest level since COVID in 2020. By the end of 2026, vacancy rates could even be at pre-COVID levels of c 12.4%. Vacancy rates remain highest in Shopping Centres (Q3 2025: 16.5% but disproportionately weighted to Secondary schemes) but are improving at the fastest rate (-120bps Y-o-Y), followed by High Street (13.5%, -50bps). Vacancy rates on Retail Parks (6.1%) are at their lowest level since Q2 2018. The direction of travel across all core Retail channels remains positive. But slow.

Rental Growth

Improving occupier dynamics are also manifest in rental performance. According to MSCI, All Retail rents are on course to grow by c.+3.5% in 2025, which would represent the strongest annual growth since 2006. This growth is being spearheaded by High Street shops (+6.9%), but growth is also creditable (and sustainable) across Shopping Centres and Retail Warehouses (both +2.9%).

Autumn Budget

As documented in previous Retail Notes, 2025 Autumn Budget threw up some fresh challenges. From April the minimum wage will increase from £12.21 to £12.71. Pitched as a boost to the retail sector, increases in the minimum wage are actually a major cost headache for retail and hospitality operators. The latest rise represents an annual increase of +4.1%, lower than the average of c +6.0% over the last 10 years, but still higher than inflation.

Although the High Street was singled out as a ‘winner’ from the latest business rate revaluations, the devil is in the detail, and the notion of higher value properties (>£500k RV) subsidising their lower value (<£51k) counterparts is not all it seems. Larger properties will indeed be saddled with higher business rates, but so too may many smaller properties, the removal of the 40% relief they previously enjoyed more than outweighing any favourable benefit afforded by a discount to the multiplier.

Structural Change

There are growing signs to suggest that structural change in retail may finally be playing out. Online penetration is flatlining at c. 28% on an annualised basis. Online is no longer growing exponentially, but it is an established channel within the wider retail ecosystem. Online and physical stores continue to enjoy a symbiotic relationship and the notion of them being competing forces needs to be put to bed once and for all.

Importantly, the pendulum of investment is swinging back towards physical stores. For much of the last decade, retailers have invested heavily (and disproportionately) in online, ramping up their multi-channel capability at the expense of their stores. With online now at scale, key retailers (e.g. Marks & Spencer, John Lewis) are increasingly re-channelling investment into the store estate. By doubling down and re-investing heavily in stores (existing as much as new sites), they are underlining their ongoing commitment to bricks and mortar retailing.

Investment Credibility

Total Retail investment volumes in 2025 are forecast to reach £5.83bn by year-end, down -17% on 2024 and -8% on the 10 year average. Generally, this underperformance is supply-driven, caused in particular by a shortage of large-scale Shopping Centre availability/activity in the first half and a significant slowdown in Retail Warehousing activity in the second half.

But there is growing belief amongst investors that Retail has turned the corner and is now a holistically investable sector. Total Return data justifies this thinking, with Retail delivering +9.2% to Q3 2025 (annualised YTD), the highest of the traditional sectors (Industrial +9.1%, Offices +3.2%, All Property +6.6%). Shopping Centres and Foodstores lead the way, both with Total Returns of +10.2%. Furthermore, all Retail rents are projected to have grown by +3.5% in 2025.

Encouragingly, deal volumes showed an uptick in activity in Q4 2025 in all but Out of Town. Core money (the mainstay of Prime Out of Town) has been waiting on sidelines, with a number of assets remaining available, unsold. Whereas the In Town market – historically appealing to a more opportunistic buyer pool – has seen yields under downwards pressure, growing investor demand and institutional buyer activity.

With a number of ‘big tickets’ available/having recently been agreed, we expect volumes in H1 2026 to be superior to that witnessed this year.

Retail forecasts remain robust, with total returns projected at approximately +9.5% for 2026 and +8.4% pa over 2026 to 2029. Risk adjusted income remains the key driver for the Retail sector, with a projected Income Return of +5.7% – outperforming the All Property average of +5.0% (over 2026-2029).

Summaries by sub-sector:

Retail Warehousing 

• Annual volumes are -26% below those of 2024 but broadly in line with the 10 year average. Quarterly data shows a strong start vs a slow end to the year.
• Activity at the Prime end of the market is more limited, but Good Secondary, offering a more attractive income return, is highly sought-after.

Foodstores 

• Wide and varied investor demand not fairly reflected in deal volumes, which sit -21% below the 10 year average.
• Dearth of openly marketed Foodstores (only five £10m+ stores in H2) but volumes boosted by renewed uptick in Sale & Leaseback activity.

High Street 

• Deal volumes picked up meaningfully in H2, with £420m transacted vs £280m in H1, a +50% increase, but volumes still well below the 10 year average (£700m vs £1bn).
• Increased availability and demand for larger lot sizes should improve volumes next year.

Shopping Centres 

• MSCI’s joint top performing asset class in the year to Q3 2025 at +10.2% – appetite is the strongest witnessed in almost a decade.
• Bumper November saw 1/3rd of annual deal volume transacted in a month, counteracting a slow start to 2025. 

2026 – the year to come 

2026 Macro-economics – fiscal headroom, but low economic growth 

The Autumn Budget was not as ferocious as feared, placating both bond markets and Labour backbenchers to boot… but it is unlikely to ignite the economy.

A deceleration in GDP growth is an inevitability. A sluggish +0.1% Q-o-Q increase in Q3 2025 is likely to restrict GDP growth to +1.4% this year, reducing to +0.9% in 2026 and +1.3% in 2027. The Autumn Budget may have allayed some immediate macro-economic concerns but still represents a tightening of fiscal policy and the lagged impact of past interest rates hikes continues to weigh heavily.

A nuanced picture on inflation. The direction of travel on CPI generally is down, but not to within the government target of <2%. From 3.6% in October, CPI is likely to fall to 2.8% in 2026 on an annualised basis (2025: 3.4%). However, within this, Shop Price Inflation (particularly grocery) is likely to remain stubbornly high at >3%. Following a -25bps cut in December, two further reductions in Bank Rates are likely during 2026, leaving the year-end figure at 3.25%.

Many of the ‘corporate-unfriendly’ measures of the 2025 Autumn Budget are still washing through. With many companies still scaling back on recruitment, the unemployment rate is likely to continue creeping up, ending 2026 at 5.1% versus 4.8% at 2025 year-end. Coupled with a general drive to reduce labour costs in response to the increase in employers’ NI contributions, real household income growth is forecast to slow to just +0.5% in 2026 and 2027, from +1.7% in 2025.

Private consumption will remain subdued at just +1.0% in 2026 (2025: +0.9%), but within these wider consumer spending figures, retail sales are likely to outperform. Retail sales values are forecast to grow by +2.5% in 2026, below both long term (30 year) and 10 year averages of +3.5%. Retail sales volumes will remain in positive growth territory (c +1.0%) for the second successive year. With sticky inflation in food, grocery volume growth will be challenged.

Property Prospects – Retail remains the leader of the pack

Much more than a one-trick pony – all Retail sub-sectors are showing strong performance, not just Retail Warehousing.

A slight change at the top of the table – Foodstores and Shopping Centres are now supplanting Retail Warehousing as the top performing asset classes, not just in retail but across all real estate. Standard shops are lagging slightly, but even that gap is closing as all retail sub-sectors home in on double-digit annual returns.

All Retail property is forecast to achieve total returns of 9.5% in 2026, on top of a projected return of 9.6% this year. In both cases, this is above all property (2025: 6.6%, 2026: 8.2%). Foodstores are projected to achieve the highest total returns (2025: 10.2%, 2026: 10.4%), followed by Shopping Centres (2025: 10.2%, 2026: 9.5%). Having been the trailblazer the last few years, Retail Warehousing will still achieve highly respectable returns (2025: 9.8%, 2026: 9.3%).

High income return has long been Retail’s established calling card, but this is increasingly being supported by decent capital growth. All retail is forecast to see capital growth of +3.4% in 2026, a slight acceleration on the +3.3% projected in 2025. All Retail sub-sectors are forecast to enjoy capital growth of between +3% and +4% in 2026, with Standard Shops likely to be the best performing Retail asset class on this measure.

Reflecting Retail’s defensive qualities and a more stabilised occupier market, the sector is forecast to maintain market-leading levels of income return in 2026 (5.8% vs 4.9% for All Property). Income returns will remain highest in Shopping Centres (6.8%), followed by Foodstores (6.5%) and Retail Warehousing (6.1%). Standard Shops remain a slight laggard (4.6%) but are skewed by large Central London assets.

A sustained return to rental growth is arguably the best news story of all for the Retail sector. All Retail rents are projected to have grown by +3.5% in 2025, spearheaded by Standard Shops (+6.9%) and Retail Warehousing (+3.0%), the latter achieving their highest level of annualised growth since 2006. Retail rental growth is likely moderate slightly next year (+3.0%) due to weak macro-economic factors generally.

Longer Term Prospects – rebased and set fair

The Retail Renaissance continues – rebased resilience in the face of macro-economic mediocrity.

While maybe lower on the Richter scale than its previous year, the 2025 Autumn Budget nevertheless presents a raft of new challenges for the Retail sector, namely a further rise in the minimum wage and largely unhelpful tweaks to the business rate system (a higher multiplier for properties with a rateable value >£500k, a lower multiplier for lower value properties (<£51k RV) cancelled out by the removal of 40% relief).

Retail’s fundamental rebase and reset will see it in good stead to ride out a period of challenged macro-economics and low growth generally. Online growth has largely plateaued and most retailers are at scale with their multi-channel infrastructure and capabilities. The positive by-product of this will be investment redirected towards their physical estates. Retailers are already reinvesting more in their physical footprint (as much through refurbishment as new sites), a trend that is likely to accelerate going forward.

Rebased property metrics also provide a solid platform for further rental and capital value growth, underpinned by industry-leading income returns. Retail property’s quiet outperformance of other asset classes will continue apace. This is not going unnoticed by savvy property investors and this will increasingly filter through to investment volumes.

Happy New Year. And we are quietly confident that it will be for Retail property markets.