Retailers face a golden opportunity to capitalise on their existing real estate and help the UK government hit its housing targets, according to Brian Sloggett, chairman at Newsteer Real Estate Advisers.
Last year, Newsteer advised Asda as the supermarket group embarked on its first mixed-use redevelopment project at an established trading site. The retailer teamed up with Barratt Redrow for the transformation of its Park Royal superstore in west London.
The pair came up with proposals for a 60,000 sq ft flagship store on the 10-acre brownfield site, up to 400 car-parking spaces, plus 1,500 homes, around one-third of which will be affordable. The sale-and-leaseback deal would allow Asda’s existing Park Royal supermarket to remain fully open during development.
“Repurposing of a food store can act as a regeneration spur to the wider area,” Sloggett said. “We can put flats above the store and reuse part of the car park. These assets often are sitting in the heart of communities or just to the outside of town centres, which need regenerating, so they’re acting as a catalyst for regeneration.
“But these projects are complicated – they do take time, because you’re trying to put different uses together and you have to keep the retail operator going while you’re building, in most cases, otherwise you’re losing a lot of value by losing that retail operation.”
Kickstarting activity
Such moves come after years of significant pressures on the high streets around cost, efficiencies and competition, triggered by the Covid-19 pandemic. In addition, the sector has seen a shift towards e-commerce, while the use of cars has dropped in recent years, thanks to green initiatives implemented by the government.
John Lewis Partnership got the go-ahead for its first build-to-rent development last year. The retailer will turn 4.2 acres of land next to Bromley South railway station in the town centre, which includes its Waitrose store, into a 353-home build-to-rent scheme. The existing store will be retained and extended while the homes will span a mix of one-, two- and three-bedroom flats. Options for long-term tenancies will be offered to provide residents with the opportunity to remain living there for as long as they wish.
The affordable housing element is the biggest challenge in such schemes, according to Sloggett. “The principle of planning is often now well-supported because redevelopment brings housing into town centres or into community hubs close to facilities,” he said. “What planning needs to improve on is to help justify the value and ensure viability that then ensures deliverability.
“Redevelopment is expensive and, of course, viability then hits on affordable housing allowances. The government has a high priority for affordable housing, complicating viability and the chance of redevelopment happening goes down, so it is a trade-off here.”
Sloggett is not alone in pointing to viability problems as a handbrake on the government’s push to deliver 1.5m new homes over the next five years. “It is a big, big challenge for the government to hit that number unless it can deal with some form of direct development funding,” he said. “I think housing associations and residential providers are all waiting on the housing grant and the financial support to come through.
“We’ve had construction costs go up, which is part of a worldwide issue; we’ve lost lots of builders who went back to Europe after Brexit; interest rates are certainly being problematical; and, of course, there’s the softness and weakness of house prices. When you put all those together, you’ve got schemes that were profitable that are no longer profitable, and therefore there’s a viability gap to try and kickstart these.”
Audacious goal
Homes England, the government’s housing and regeneration agency, is upping its support. The body has almost doubled the funding available through its joint venture with Invest & Fund for small and medium-sized housebuilders. The initial £25m partnership was created in 2020 in a move to provide construction loans of up to £2.5m, funding schemes of two homes and upwards, at up to 80% loan-to-cost.
The refinanced agreement will increase the fund from £25m to £47.5m and extend the term of the fund to March 2030, with the partnership now offering development loans of up to £4m, at a maximum 70% loan-to-gross development value and maximum 85% loan-to-cost.
Late last year, Homes England joined forces with Oaktree Capital Management and Greycoat Real Estate to unlock large or complex sites with the potential to deliver more than 1,000 homes each. The £250m partnership will be tasked with carrying out the necessary infrastructure works so it can offer ready-to-develop locations to a range of housebuilders. The joined venture is already working on identifying potential sites for acquisitions and hopes to announce the first project this spring.
Sloggett said: “If there’s a desire to hit the housing numbers, which I think there is, and the government has set itself an audacious goal, it needs to continue lining up a funding screen to help close these viability gaps that exist or do it directly itself.
“Viability development and repurposing of retail are markets, I believe, that are strong. There’s a demand there for them and it’s where we’re trying to position ourselves as a business.”
The steer on Newsteer
Newsteer has been operating for about six years, launched by a pair of property experts who came out of Capita-owned GL Hearn in 2019.
“It was a great time to start a business,” chairman Brian Sloggett joked, reflecting on a launch shortly before the onset of the Covid-19 pandemic. “But, actually, we have learnt a lot during that period, and we feel we have a good market proposition that reflects what the market needs now. We’re 40 people. We can’t do everything. Our theory is to have deep expertise in a few things, not shallow expertise across too many things, and we have deep expertise in certain areas. We’re very specialist in what we do. And that’s the philosophy: doing things well and being very selective.”
