The Crown Estate and TH Real Estate’s decision to axe their plans for a 180,000 sq ft extension to the Princesshay shopping centre in Exeter has prompted questions over the viability of the 5.6m sq ft of extensions that are scheduled to be delivered in the UK over the next ten years.
The decision could persuade other developers to reconsider their extension plans. Those that do choose to go ahead will have to focus on how their investment will improve the asset in line with future retail trends in order to be viable, given the waning occupational market.
Insufficient demand
Katherine Armstead, senior asset manager at the Crown Estate, says: “We didn’t have sufficient demand to progress. It was a very complex development that would have taken three to four years, and occupiers are focusing on their current units. It was not appropriate for them to commit three to four years in advance.”
A development of such scale cannot progress without a sufficient number of prelets. Extra caution in the market means that occupiers are especially apprehensive about committing to developments that will not be open for at least three years. In the challenging retail climate, many occupiers are focusing on their current financial year and existing portfolios.
“It’s ballsy, but you’ve got to make the right decision,” says Stuart Harris, commercial director and co-founder, Queensberry. “The Crown and TH Real Estate were only going to encounter further problems down the line.”
Queensberry recently received planning permission for the second phase of development for its Glass Works retail scheme in Barnsley. The phase will comprise an additional 215,000 sq ft, which Queensberry is delivering with the council.
Harris adds: “If you have an existing ownership structure and funding structure, then you can leverage off the back of that, but if you haven’t because of the low rents that retailers are willing to pay at the moment, it adds a real challenge [to finding funding] and you have to think of other ways to make developments viable.”
Extend and improve
Shopping centre extensions can risk spreading demand more thinly, which can decrease the scheme’s value.
“The viability of an extension is justified by an increase in value across the rest of the asset,” says Mark Disney, director of shopping centre leasing at CBRE.
Extensions often work best in schemes where existing space is also reconfigured to improve the overall layout of the centre, such as Hermes’ £70m extension of Royal Victoria Place in Tunbridge Wells, Kent. The net square footage of the extension is only around 140,000 sq ft but the majority of the work will be on improving the eastern side of the shopping centre.
Disney adds: “To proceed with an extension, you need to know it is a proven destination that is going to get stronger, and can work as long as you don’t go too far over the top with too many units.”
Chris Taylor, head of real estate at Hermes, adds: “We believe strongly in understanding occupational demand which entails fundamental analysis of the longer-term trends that affect property. We combine this with an intention to not just deliver a financial return but also create a positive impact on the environment. This is the challenge for developers today looking to extend their shopping centres.”
Less risky than new-builds
Shopping centre extensions are still viewed as being less risky than new-build developments. More space is now due to be delivered through extensions than through new-builds in the pipeline.
“That’s for a good reason,” adds Disney. “If they are done properly, then extensions mean that strong locations are becoming stronger. They are much more likely to work than standalone developments.”
Although extensions add more space to the market, Harris believes that the main risk of oversupply could come from older stock that is no longer fit for purpose.
“New extensions and planned developments are not what concerns me,” he says. “What concerns me is the huge amount of shopping centres that we have in the UK that are stagnant and need some serious money put in them to turn them around.”
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