by James Tuckey
After the boom of the last few years, British shopping centres are now at a turning point. We are still experiencing high levels of construction activity, but what are the prospects for 1990 and beyond?
High interest rates have taken their toll on consumer spending and are predicted to remain high in the short term — so when will consumer confidence return? Probably not in 1990, and maybe not in 1991.
Developers are also very concerned about long-term interest rates. Trying to predict the future is notoriously difficult, but my view is that there is unlikely to be any significant fall in long-term rates.
However, I am worried about the current level of short-term bank lending to the property sector. According to the Bank of England, this has risen to £30bn, but very little of this lending is to the major investment companies: only £7bn of the £30bn is outstanding to the entire quoted property sector, say BZW.
Although there is no breakdown showing the bank’s exposure to retail developments, short-term money has played a major part in boosting the supply of retail accommodation, whereas long-term institutional investment in shopping is currently at a very low level.
Two other economic factors need to be considered: VAT and rates. The effect of the new VAT regime on retail property will be almost neutral because virtually all retail property will be taxed.
The only losers will be financial service companies occupying retail outlets. I cannot foresee any of the major problems that are looming for the office sector — there will be no two-tier rental market in shops.
The uniform business rate, or UBR, is another matter. The change in April will have a dramatic impact on retail businesses. The Inland Revenue estimates that retail rate bills will increase 18% across the country, offices will rise 16% and industrial/warehousing will fall 15% to 30%, but there are wide regional variations.
Phillips & Drew estimate that rates represent between 0.5% and 3% of sales and from 5% to 50% of retailers’ profits. So the anticipated rate increases will have a significant effect on their profitability, and will counteract rental growth due to other factors. Although the UBR has been in operation for a year in Scotland, it is too early to draw any firm conclusions.
Exchange rates
With the next election due some time before May 1992, the possibility of a change of government will bring pressure on exchange rates. Since exchange controls were abolished in 1979, the financial markets have never had to face up seriously to the prospect of a change of government so it is difficult to predict what will happen if the polls continue to show Labour with a lead of 10 points or more over the Tories throughout 1990 and 1991.
Demographic trends are also relevant to the New Realism. Changes in the age profile are directing our attention away from the younger spending groups to the older ones — the so-called “grey wave”, who tend to be more stable, predictable, creditworthy and less fashion-conscious.
Current design ideas have not yet adjusted to this, and I wonder if the hi-tech bright-light yuppie style is quite so relevant. Retailers recognise this, but designers tend to be young, and they will increasingly be designing for generations older than themselves.
Personal saving in Britain fell last year to 3% — its lowest level for 30 years. This decline is the counterpart of the consumer spending boom. By comparison, the Japanese savings ratio was 15.1% and the US 6.3%. But the grey wave save more, and it will not be long before we are faced with persuading them to come out of the building societies and into the shops.
Traffic congestion
The South East will continue to dominate the economy, and the general drift of population south will continue. However, if one has a job outside the region the thought of moving south is not attractive, even at a higher salary.
Unemployment in the South East is lower than elsewhere, and some say the region has full employment. There will be a slow relocation of businesses away from the South East in response to skill shortages and frustration with the congestion on the roads and public transport. A recent Mintel survey shows dissatisfaction with the quality of retail sales and after-sales service. Customers would like to spend less time doing their grocery shopping and be able to leave foodstores faster, but they would also like more detailed information when choosing household durables, and better after-sales service when they have made their choice.
Car ownership is critical to the future of the retail industry. Given the Government’s apparent reluctance to spend money on public transport, everyone will take to the roads — but will the roads be able to take them? Tales of increasing congestion are legion, but things will only get better if the Government acts soon.
I do not believe that a major road programme is politically possible: the NIMBY movement is much too strong for that. So, as road congestion gets worse, more money will be found for public transport improvements, particularly underground, and this will obviously benefit traditional town centres served by a transport infrastructure that has been in place for 100 years or more.
Planning decisions
What of planning? A number of major planning decisions affecting the retail sector are outstanding, and it is to be hoped that a more consistent and rational determination of planning decisions will ensue.
The number of shopping centres in the pipeline reached a peak in the second half of 1988, but the amount of space with consent and under construction has continued to rise. In June 1989 the amount of town-centre space in the pipeline totalled 67.1m sq ft, and the amount of out-of-town was 93m sq ft. Although 60% of this new development is out of town, town-centre retailing still accounted for 82% of existing retail floorspace at the end of 1988. I hope this marks the peak of out-of-town shopping.
MEPC are firmly committed to the established town centres. These form a vital part of the fabric of our society, and must not be further eroded by excessive out-of-town retailing. One has only to look at the mistakes made in North America to realise how fragile the balance is. I hope the need for the correct balance will be reflected in future planning decisions.
Schemes under way or with planning consent total 81m sq ft. Assuming completion within five years, this implies an average annual supply of 16m sq ft, which is more than 1.5 times the amount completed in 1988, and three times the average annual supply over the period 1965-88, according to Hillier Parker.
So who is going to take up all this space? And where are the customers coming from? There is no population growth to speak of, and we are now seeing a far less optimistic consumer and a rapid slowdown in consumer spending.
Some of the schemes with consent may not get built because of market pressures, and there has already been a slowdown in development proposals, but, whichever way one looks at it, there is a massive amount of new space coming on to the market in the short term.
Prince Charles factor
What conclusions can one draw? First, location will reassert itself. Some schemes will be difficult to let because they are poorly sited and have difficult access.
Design will increase in importance, and we will have to address the Prince Charles factor. Do our centres meet his Ten Principles? Whatever our personal views, we must remember that the general public — our customers — are overwhelmingly on the Prince’s side in this debate. We ignore this at our peril.
Careful selection of tenant mix goes hand in hand with design excellence. Customers are bored with the similar trading formats of the major operators. Shopping-centre owners will have to be more adventurous with non-multiple covenants. Hopefully, we will see more international retailers in the UK, particularly European ones, with 1992 coming up. We must get away from the boring repetitiveness which characterises so many centres.
Developers will become more sophisticated at marketing their schemes, and here we have a lot to learn from North America. Customers will increasingly need to be persuaded to visit centres, not out of necessity but out of choice. Tenants may well be in a stronger bargaining position than they have been in recent years, and there are already signs of this.
Management of shopping centres will become more important, along with better training and greater emphasis on marketing. Customers will be attracted by greater variety, interesting promotional events, non-shopping activities and a wider mix of retailers.
A recent survey confirmed that customers do not favour regular shopping in schemes biased towards standard fashion multiples. They prefer a good-quality department store as anchor tenant, are increasingly concerned about ambience, and consider good parking is essential, with the layout and signage of parking increasingly important.
Green issues
Among the green issues that directly affect our business are a number of building matters. What is the future of air-conditioning? Should we revert to natural ventilation wherever possible? Should we continue to enclose older, open shopping centres, which then require forced ventilation or even air-conditioning?
Should we replace CFCs? Are substitutes available? What about insulation and other products using CFCs? Should we exclude them? Should we raise insulation well above current levels to reduce running costs and save energy?
On the management side, are we ensuring the highest standards of maintenance to maximise the life of existing plant and materials and prevent premature breakdown? Are we ensuring the proper disposal of hazardous materials?
I deliberately pose these issues as questions and not answers. We will become increasingly familiar with the issues throughout the 1990s, and anyone who thinks they will go away like so many other liberal-sounding complaints is wrong. We have established an Environmental Concern Committee at MEPC to look at these critical design and management issues in a balanced way.
At the end of the day, however, the question is: who is going to pay for changes? If, for example, we changed the specification of schemes under construction and replaced CFC-based insulating materials with more expensive substitutes, would we get more rent to compensate for the extra cost? Probably not.
What the customer wants
That brings me to service. I do not believe that our business has been paying enough attention to what the customer wants. As developers, we spend too much time preoccupied with what the retailers think, but they are only a stepping stone to the customer.
Do we really know what the customer wants? Or do we only think we know from what the retailers tell us?
At the design stage, are we giving enough thought to what the customer wants? Developers must get closer to their customers.
I am always surprised at the level of understanding of retail businesses shown by developers and property managers in the US. They really know what makes a successful retailer, and their knowledge of the turnover experience of individual retailers and different locations contrasts sharply with our more limited knowledge of zone A rental values and the like.
We need a closer relationship between landlord and retailer. We should be a partnership working together to provide what the customer wants in the best possible surroundings. In the US, turnover rents have undoubtedly helped the partnership atmosphere, and I believe they will become increasingly common here, notwithstanding retail and institutional opposition.
We must increase the level of trust and confidence between retailer and developer. There can be little doubt that the next five years are going to be totally different from the last five. The going will get tougher — and not everyone will survive.
James Tuckey FRICS is managing director of MEPC. This article is an edited version of the keynote address given at the third annual conference of the British Council of Shopping Centres at Harrogate on November 13.
