2nd UPDATE: UK Retail Rents Start To Rise In Prime Locations

British Land PLC (BLND.LN), one of the U.K.'s biggest retail space landlords, Tuesday said there are signs that renewed demand from big 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 been hit hard by the economic downturn and retailers are still warning that the outlook is uncertain due to the fragility of the U.K.'s economic recovery and impending tax rises and public sector job losses due to government spending cuts.

However, 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 (MRW.LN), which currently has most of its stores in the north of England, is expanding southwards; J Sainsbury PLC (SBRY.LN) is adding more non-food and convenience store space; and Wal-Mart Inc.'s (WMT) Asda is integrating its Netto store purchase and opening more smaller store formats. Tesco PLC (TSCO.LN), 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 2 million square feet in fiscal 2010.

Non-food retailers including fashion chains New Look, Next PLC (NXT.LN) and Arcadia Group and baby product retailer Mothercare PLC (MTC.LN) 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 Co. Inc. (BBY) led new lettings of British Land's out-of-town space. Best Buy has a new joint venture with Carphone Warehouse Group PLC (CPW) 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," 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."

The company's retail tenants include some of the U.K.'s biggest retailers, including grocers Tesco, Sainsbury and Asda, department store operator Debenhams PLC (DEB.LN) and home improvement stores Homebase, owned by Home Retail Group PLC (HOME.LN) and B&Q, owned by Kingfisher PLC (KGF.LN). About 65% of its current portfolio is in retail, and 85% of that it considers to be prime out-of-town sites.

During the downturn, large retailers like the national supermarket chains have continued to perform well, but many smaller retailers have gone out of business, unable to offset a drop in consumer spending. 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 big chains are located and values and rents in the U.K.'s high streets.

Grigg highlighted a deal to let 47,000 square foot of space to Best Buy. 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 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, peer Land Securities 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 on 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 expiries over the next three years.

-By Steve McGrath, Dow Jones Newswires; 44-20-7842-9284; steve.mcgrath@dowjones.com

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