UK market still in its infancy with the larger operators having an edge

The UK factory outlet shopping centre market is still in its infancy and many institutional investors are not well acquainted with the concept. The sector currently makes up around 1.5 per cent of the total shopping centre stock in the UK. However, this is predicted to rise to two per cent within the next 12 months.

There are 27 existing schemes in the UK, which are mostly found in the regionally dominant centres, such as London, Glasgow, Edinburgh, Manchester, Cardiff, Liverpool and Newcastle-upon-Tyne. The largest of such schemes is BAA McArthur Glen's 390,000 sq ft York Designer Village, based in the historic city.

As with any UK edge of town, or out of town schemes, tight planning restrictions on use of space and design are imposed, which factory outlet centre (FOC) developers can find constraining. As a consequence, developers demand that tenants maintain a strict discount policy - selling products at least 30 per cent cheaper than the high street.

Tenants prefer to join schemes owned by the most influential operators, such as BAA McArthur Glen, Freeport Leisure and MEPC. Although relative newcomers to the FOC market include companies such as Swan Hill, even US real estate investment trusts like The Mills Corporation are eyeing sites in the UK with a view to taking a slice of the FOC pie.

It seems the sector's unique investment characteristics, such as short leases and turnover rents, with income receivable monthly in arrears on a turnover basis, is proving very attractive for potential developers.

Meanwhile, a host of upmarket tenants such as Versace, DKNY, Armani, Paul Smith, Dunhill, Polo Ralph Lauren, and Dolce and Gabanna, along with more middlerange high street operators, have signed up to take advantage of the consumer's appetite for value-for-money shopping at FOC's.

It appears the quest for discounted merchandise is spurring the bargain hunters of Britain to jump into their cars and drive on average for an hour to a factory outlet mall. And according to recent research, consumers are spending £80£90 sterling per head, compared to £40£50 sterling in traditional regional shopping centres.

As the UK factory outlet centre market is maturing, a pecking-order of centres is developing, with the larger centres at the top of the pile, followed by smaller concepts. However, many believe the future lies in the smaller "village-style" operations rather than the larger supercentres, which can be in danger of becoming too "spread out". It is felt some of the smaller centres may be more able to withstand tough market conditions.

The market is evolving. This is substantiated by an estimated 1.83m sq ft in the development pipeline for new schemes and extensions to existing sites.

This figure includes The Berkeley Group and Lordland Property Holdings' 185,000 sq ft FOC, situated on their mixed-use site - Gunwharf Quays - which is currently being developed on the former Royal Navy dockyard, in Portsmouth.

Unusually, the scheme comprises a leisure element - which up until now has not been the norm. The leisure aspect includes a Warner Village multiplex cinema, alongside restaurants and bars.

But what does the future hold for the UK FOC market? It is now shifting away from purely a retail offer and a leisure element is now becoming a key factor of future FOC development. Property professionals believe leisure will become a standard consideration for future developments.