Retail standout property class in 2025, with 9.5% returns expected this year
Retail property has re-established itself as a core real estate investment sector, according to research from Knight Frank, outperforming all traditional property classes in 2025.
The sector is also forecast to deliver total returns of approximately +9.5% in 2026.
According to Knight Frank, online penetration of the retail sector has now flatlined at around 28%, with retailers now allocating capital back into their bricks-and-mortar estates.
The research also found that total retail investment volumes are forecast to reach £5.83bn in 2025, down 17% year-on-year and 8% below the 10-year average. This shortfall is largely down to a lack of available stock, rather than weakening demand. With pricing strengthening and rental growth feeding through, transaction levels improved meaningfully in the second half of the year, and Knight Frank said this momentum is expected to carry into 2026.
Retail also delivered +9.2% total returns year-to-date to Q3 2025, the strongest performance of all traditional property sectors, outperforming industrial (+9.1%), offices (+3.2%) and all property (+6.6%). Shopping centres and food stores, which have seen an uptick in sale-and-leaseback transactions, were the joint top performers, each delivering +10.2%.
Shopping centres recorded a turnaround in sentiment and performance. Transaction volumes accelerated sharply in the second half of the year, with more than £1bn traded, and prime yields tightening by 25 basis points to 7.25% NIY.
High Street retail also saw a rebound in activity, with £420m transacted in H2 2025, a 150% increase on H1. Competitive bidding has reemerged in prime centres and regional cities, supported by the strongest rental growth in the retail market, forecast at +6.9% for 2025.
Knight Frank said that occupational conditions across retail are now in their strongest position for more than a decade, supported by declining vacancy rates, sustainable rental growth, and a marked slowdown in large-scale occupier distress. In Q3 2025, national retail vacancy stood at 13.5%, its lowest level since 2020, with further compression anticipated into 2026. Income returns of around 5.7% are expected to continue to outperform the all property average, reinforcing the sector’s appeal to income-focused investors.
Sam Waterworth, partner, high street – Capital Markets, Knight Frank, said: “Retail has decisively turned a corner with 2025 marking the high street’s rebound. Occupational markets are the strongest they’ve been in over a decade and pricing has rebased, which is clearly reflected in retail’s total return performance. Retail’s high income return and improving rental dynamics continue to attract capital, with an increasing numbers of investors deploying where cashflows are durable and risk is appropriately priced.”
Will Lund, partner, head of retail – Capital Markets, Knight Frank, added: “With online penetration flatlining and retailers reinvesting in physical space, the narrative around retail has fundamentally changed. Shopping centres and foodstores are now leading performance across all real estate, while retail warehousing remains the occupational darling. Across the board, retail is a holistically investable sector. We have great confidence that this demand is going to drive a return to decade-high investment volumes in 2026 and we are expecting a busy year across all of the subsectors.”