by Harold Couch
“Things will never be the same again,” said a well-known developer — not in 1991, but in 1974. Well, he was right in many respects. There was a long and deep recession following the Arab/Israel war of 1973 and a near quadrupling of oil prices. Inflation rose to 27% in August 1975 and development became almost impossible in view of escalating building costs, stagnant rents and high interest rates. However, gradually the market recovered and new shopping centres were started in the latter part of the 1970s and throughout the 1980s.
So how do things look in 1991? I suspect there is a widespread feeling that things will never be the same again, with concern about oversupply, lack of development finance, high interest rates and weak retail demand.
I believe it is too simplistic to say there is an oversupply of shopping floorspace and, in considering this issue, we need to look at a few facts.
In the seven-year period from 1970 to 1976 inclusive, 44m sq ft of shopping floorspace was opened in centres of 50,000 sq ft or more. This was mainly in town centres, with the notable exception of Brent Cross. From 1986 to 1992, an estimated 30.4m sq ft will have been opened in town centres, with a further 11m sq ft in out-of-town locations such as Metro Centre, Meadowhall and Lakeside Thurrock.
The overall total for the two seven-year periods is not dissimilar. It is only when retail park floorspace is included in the equation that the totals become very different. From 1986 to 1992 some 32.2m sq ft will have opened in retail parks, giving an overall total for this period of 73.6m sq ft of shopping floorspace built in town centres, out-of-town and retail parks.
This seems a lot, but when one considers that this 73.6m sq ft represents an annual net addition to the UK total floorspace stock of less than 1.5%, it no longer seems an unsustainable amount of additional stock. What we should remember is that the current problems in letting shopping centres are due far more to the state of the economy and high interest rates — which have led to a recent decline in the retail sales volume — than as a result of an oversupply of retail floorspace.
As I see it, the majority of floorspace in the pipeline is likely to be taken up as consumer confidence improves — and it will be only the poorly conceived centres in marginal locations which will continue to suffer letting problems.
It should also be borne in mind that the traders represented in retail parks are not competing directly with the majority of durable-goods retailers in town centres. Indeed, they are providing a retail facility for which there was only limited demand in the early 1970s. This is one of the many responses to the enormous growth in consumer expenditure during the past 20 years — about 20% in real terms.
For the moment, though, the reality is that many developers and investors are faced with static or falling rents, letting problems, high investment yields and pressures on service charges. Consequently, capital values have fallen substantially — and in some cases the value of a new development is less than the total capital cost. Against this background, few, if any, new shopping centres will be started during 1991 and relatively few in 1992.
All of this suggests that shopping centres will be unattractive investments and that there will be few developers willing or able to start new projects. This will certainly be the case for the next few years, but, overall, I think we will see a resumption of activity during the 1990s and into the 21st century. It is worth noting that, despite the enormous shopping-centre development activity during the 1980s, the total floorspace in shopping centres throughout the UK is only 13% of the total shopping floorspace; whereas in America shopping centres represent more than 40% of the total floorspace. We will not follow the North American pattern exactly, but there nevertheless appears to be obvious scope for more shopping centres.
In 1987 there were 48 proposals for out-of-town shopping centres of 500,000 sq ft or more, but only a handful of these have been built and I do not see any prospect of a significant resurgence in out-of-town shopping development. My best estimate is that we will see only 10 or 12 major out-of-town centres by the year 2000.
When will the market improve?
It is likely that rental values will fall in most parts of the country during 1991, but I believe there to be a reasonable prospect of retail sales volume beginning to grow again in the first half of 1992, leading to an upward movement of rental values thereafter. Average yields for prime shops in May 1991 were at an all-time high (7.6%), but I see this figure beginning to fall by the end of this year and continuing to fall during 1992.
Interest in acquiring shopping centres is modest — owing. I believe, to a mismatch between the yield required by the vendor and that required by the purchaser. As the market adjusts to the events of the past two years, this mismatch of yields should be eroded, with an investment market for shopping centres becoming increasingly active, albeit at a higher yield than in the late 1980s.
The shopping-centre investor of the future will be rather different from those of the 1980s, with a growing involvement from abroad — and it is the overseas investor who may provide the catalyst for shopping-centre enterprise.
The investment market in unit shops has started to improved, based on a perception of reasonable rental growth in the medium term. I think that it is only a matter of time before this perception extends to shopping centres, but with lower expectations of rental growth than we saw in the 1980s, and yields will be at least one percentage point higher than they were then. Nevertheless, the fundamentals of shopping centres are such that, taking the 1990s as a whole, rental growth will be in excess of inflation.
As always, investors will be looking for well-located shopping centres with good anchor tenants and an attractive tenant mix. Investors will tend to be concerned about the size of individual investments and some form of consortium will need to evolve if there is to be a market for larger shopping centres.
Prospects for new development
The combination of falling rents, high yields and limited development finance make it difficult to envisage much development in the near future. Any activity will inevitably lag behind a resumption of investment and, with few exceptions, development appraisals are unlikely to attract finance and lead to development starts until at least 1993. Thus, a strong shopping-centre development cycle will not begin to emerge until the end of this decade.
Site values have fallen significantly and when landowners’ expectations adjust to the changed market conditions, the prospects for new development will improve. This process is only just beginning, and there will need to be sustained rental growth and lower yields before confidence returns to the market.
In the interim the main emphasis will be on the completion and letting of centres under construction, with continuing refurbishment activity and the pre-planning of new centres for the latter half of the decade. There is always a long lead-in for major shopping centres, and now is the time to start planning them. Positive centre management will also be increasingly under the spotlight, as will pressure from retailers to contain service charges.
In conclusion, I am of the opinion that the prospects for shopping centres in the medium term are good. Moreover, the market will gradually find a new level, with higher yields and a proper allowance for the costs of management. Rental growth will be lower than in the 1980s, but performance prospects are better than in the office sector.
