5 December 2018

Hit the Road ... what is driving the rise of roadside retail and where is it heading?

The ailing state of the British high street has dominated the headlines in 2018, as household names crash into CVAs and stalwarts such as M&S close stores up and down the country.  However, whilst occupiers in local towns and cities may be suffering as a result of rising rents, rates and other overheads (not to mention the decline in footfall linked to shop closures), forward thinking companies are looking (quite literally) further down the road and exploring new opportunities in the shape of roadside retail.

Not so long ago, the highlight of a long motorway journey would most likely have been stopping at a Little Chef for a lukewarm coffee and perhaps some fish and chips.  If you were lucky, there might have been a convenience store where you could pick up some Winegums or similar to make the remainder of the journey mildly more interesting.  Not so now.  The rise of roadside retail began with the fast food chains — McDonald's has been opening drive thru restaurants since 1985 — but in recent years the offerings at service stations has increased enormously to include higher end retail outlets such as Waitrose, M&S Simply Food and Costa.

But it is not just the food outlets and convenience stores that are looking to increase their retail offerings — Metro Bank, Debenhams and Benefit Cosmetics are among the retailers capitalising on the rising popularity of the drive-thru model.  It is easy to see the appeal to customers (no need to find a space, pay for parking or brave the British weather) but of real interest for our clients is the opportunities it presents for landlords.  Besides convenience, there are other factors at play — the growing popularity of electric cars brings with it the possibility of installing charging points at roadside sites (cars can take upwards of 30 minutes to charge meaning drivers are spending more time at the outlets) while franchising arrangements with major retailers can create "destination shopping" all in one place.  Moreover, the limited number of sites offering the access and visibility from the road that retailers require has inevitably increased demand and consequently rents, which are defying the falling levels in towns and cities.

Forsters has recently acted for a client looking to capitalise on this growing market.  Having acquired a number of roadside properties (many adjacent to petrol stations with the potential to install charging points), our client completed a re-gear of all the leases with EG Group, a prominent British retailer dominant in the roadside market.  The combination of long leases, fixed rent increases and the strong covenant strength of the tenant made the portfolio an attractive proposition and they struck a deal for the sale of the properties to LondonMetric Retail for a combined price in excess of £12million (the deal completed in October – see https://www.egi.co.uk/news/londonmetric-enters-drive-thru-market/). Proving that it is not only REITs and institutional investors looking to make the most of these opportunities, a second tranche of properties within the portfolio were sold earlier this year to a number of individual investors, no doubt attracted by the same factors.

Perhaps the most interesting thing about the rise of roadside retail is the different forms it can take as operators think outside the box to find new ways to exploit the opportunity.  McDonalds, Costa and Greggs are looking to capitalise on the potential of pod-style drive thrus in unused car parking spaces in supermarkets and out of town retail parks, giving landlords the chance to increase the value of their land with minimum effort.

The downside is that this growing market cannot help but damage the high street further, as investors turn their sites from town centres to service stations.  Yet it is encouraging to see that there remains a retail and F&B sector which is not only thriving but expanding, with opportunities for those who seek them.

Claudia is an Associate in our Commercial Real Estate team.

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