The shopping centre sector has seen huge disruption in the past decade, principally at the hands of the growth of e-commerce. While that disruption is now starting to stabilise, the sector has experienced fundamental and permanent changes, one of which is the nature of shopping centre owners in the UK. The other is the repurposing and repositioning of traditional malls to reflect the consumer’s modern-day demands.
Who is investing in shopping centres?
Ten years ago, the majority of the UK’s top 100 shopping centres were owned by real estate investment trusts or institutions, and they were the most likely buyers. Today, REIT and institutional ownership is largely confined to the top 50 assets, and their buying activity has been very limited since the Covid-19 pandemic.
Private equity ownership boomed in the post-2007/08 global financial crisis period and interest from these buyers is now starting to return. However, by far the most active buyers are the smaller, private property companies, which have been the buyer pool for more than 50% of the shopping centre trades in the UK since the pandemic. This new generation of investors is attracted to the sector by rebased values and high-income return. In some instances, typically where values have fallen below £50 per sq ft capital value, they are looking to pursue repurposing projects.
We also continue to see local authorities being active in this sector, taking control of malls within their own areas. These are now generally the more challenged assets where values have fallen and major landlord intervention is necessary to restore prosperity. These are assets bought for regeneration rather than income, as was the trend pre-Covid.
A further interesting trend has been the emergence of retailers buying shopping centres to become landlords. Frasers Group is the most active, acquiring large shopping centres in Luton and Dundee in 2023. However, Ikea holding company Ingka Group also bought a large scheme in Brighton, following previous purchases on Oxford Street and in Hammersmith. This collective confidence from retailers in the future of physical retail is surely to be seen as a huge positive for the sector.
Attractive rebasing
With an increasingly accepted perception that rents and values have appropriately rebased, the sector’s prospects are greatly improved. We are now seeing a wider group of investors take an interest in the sector, particularly in the prime market. Lenders are also more willing to consider retail now, as seen with significant recent lending activity from mainstream lenders including Lloyds and NatWest.
There will continue to be winners and losers in the sector. The oversupplied middle market still looks concerning, and the capital expenditure required will significantly erode the income return from some dated assets. The transition to net zero looks challenging in multi-level covered schemes, and that will restrict yield compression as institutional capital will continue to shy away from assets with ESG concerns.
In the short term, around 8% income return from prime assets looks attractive and we are likely to see yield compression here. Landsec has declared its desire to seek further assets in this space, and the recent interest in prime sales has been stronger than we have seen for many years.
Value-add and repurposing
A 10%-plus income return from “value-add” can be attractive where deemed sustainable. In addition, active owners will continue to look for viable repurposing projects, especially where residential can be merged with retail for mutual benefit.
We have seen other recent examples of the replacement of retail space with health hubs (NHS centres and gyms), life sciences premises (wet labs), transport hubs and public outdoor spaces. Particular examples of local authorities completely transforming shopping centres to create new community spaces with multiple uses include Nottingham City Council’s plans for the former intu Broadmarsh Centre and Oldham Council’s planned transformation of the Spindles Shopping Centre.
What happens next?
If the cost of debt comes down as the year progresses, either from swap rate movement or from a reduction in lenders’ margins, it is quite possible that we will see yield compression in the sector.
It is, however, notable that a large number of centres with stabilised market conditions remain in the hands of would-be sellers, who are looking for the optimum sales window at some point in the next 24 months. As such, stock volumes are likely to rise at some point to meet, and possibly exceed, levels of investment demand, and it may be that those who choose to sell early are able to capture the best audience.
The challenges
There is a raft of legal implications arising from the new entrants to the shopping centres market and the repurposing of centres. The likes of Ingka and Frasers will have had to deal with the ability to gain vacant possession from some tenants and to move others around. Frasers, in particular, will have had to deal with knotty legal issues such as exclusivity clauses and tenant mix policies in retailers’ leases when seeking to reposition the retailers they own in the shopping centres they have acquired.
In terms of changing the use of parts of existing shopping centres, owners will obviously also need to look at vacant possession strategies to gain control of units needed for the projects and to deal with the planning aspects of changes of use. For the larger wholesale repurposing of shopping centres, wider vacant possession strategies will be needed as well as the usual legal aspects such as planning, compulsory purchase, rights of light, highways, ESG and building safety.
Stephen Scott is a real estate dispute resolution partner at Howard Kennedy and Charlie Barke is a partner, head of capital markets and leads the retail division at Knight Frank
