Our retail property market is under enormous pressure in town and city centres across the UK, writes Daniel Mead.
Recent sales of Callendar Square, Falkirk for £1M and Abbeygate Centre, Birmingham for £4.3m reflect enormous discounts from pre-financial crisis highs. The retail landscape is changing rapidly, driven by shifting consumer habits and retailers failing to generate profits, as their offer becomes increasingly outdated. Even retail leaders Next and John Lewis are struggling to maintain profits.
The weakened pound has created cost pressures, exacerbated by a rise in overall occupancy costs driven by upward-only rent reviews, rates increases and service charge increases. The perfect storm is being heightened by dwindling consumer spending, as stretched household finances affect consumer confidence.
Online shopping patterns will continue to reduce the need for a physical real estate presence for many operators, and with continued business failures leaving their mark on many high streets and shopping centres, occupier demand for units of all shapes and sizes is falling.
Outdated business plans
The pressure that all of these factors puts on the retail property market sees some asset managers left with business plans that have quickly become outdated or worse, have proven to be misconceived in origin and are now undeliverable.
So, what’s next for the owners of secondary and tertiary shopping centres?
APAM research shows that owners typically fall into four camps: local authorities, privately funded asset managers and developers, institutional investors, and specialist REITs (intu, New River, Hammerson etc).
The REITs and institutional investors are typically invested in the better regional centres and focused on reducing operational costs or, in some instances, M&A activity to change their model.
In the privately funded and local authorities categories there is likely to be increasing stress. Between 2012 and 2016, a number of private equity firms acquired secondary and tertiary shopping centres valued at more than £3bn with significant leverage. As a result, many of these structures are now hampered by falling values and a lack of further capital and appetite to upgrade, reconfigure or redevelop.
Councils are increasingly investing in commercial property, particularly in their own town centres, however questions are being raised as to whether they have the expertise and resource to deliver creative asset management strategies in this challenging environment.
Uncertain landscape
Despite the uncertain landscape, there are many reasons to remain positive. Secondary and tertiary shopping centres can have brighter futures. But in order to make a success of these assets, tailored and carefully executed plans are needed to ensure that they remain attractive for customers and financially profitable for investors in the future.
Investors need to take a longer-term view to reposition town centre assets with change of use and redevelopment at the forefront of their plans.
There is no one-size-fits-all solution, as a range of factors, such as the unique features of the asset and its surrounding local market, must be taken into account. Key to this is engaging with all relevant stakeholders, including local councils, BID managers, commercial operators and customers.
Asset managers must get to know their locations inside out, immersing themselves in these markets to ensure that they combine their expertise with first-rate market knowledge. Only then will they be able to create environments in which the local community will want to spend time and money.
The industry must work together to ensure that these assets are able to adapt to suit consumers’ changing needs. Shopping centres are often well-located close to residential areas and good transport connections, both of which are highly valuable features.
The focus should be on fostering a more mixed-use approach which provides opportunity for increasing footfall and brings a renewed sense of purpose to the asset. Independent retailers, markets, cinemas, restaurants, healthcare, offices, residential and leisure uses can all contribute to boosting an asset’s appeal, alongside a wider retail offer that is appropriate for the local market.
Reinvigorated town centres
Such is the opportunity for the foresighted investor/shareholder to reinvigorate UK town centres, bringing them in line with today’s market, rather than clinging on to the forlorn hope that 1970s and 1980s developments will come back into fashion.
As the market finds its natural level again, we believe there is a burgeoning investment opportunity. Longer-term investment and development capital is searching for opportunities and experienced asset management partners will find value in these assets.
Despite headline news of the retail market’s ongoing struggles and the prevailing threats of online shopping and rising property costs, many town centre retail assets occupy prime locations within their communities. People will continue to visit shops, restaurants and bars along a high street or in a shopping centre while also benefitting from the convenience of online shopping.
We are, after all, still “a nation of shopkeepers” – we just need to adapt rapidly to suit the modern consumer, combining the benefits of instant online comparative goods shopping with a truly enjoyable experience.
Daniel Mead is head of shopping centre asset management, APAM
