In the first of a new series, Noella Pio Kivlehan asks representatives from a group of specially selected companies to comment on one of the top issues of the day
Featured companies
?Land Securities
?Savills
?Henderson
Retail Talks asks:
With so few major developments coming out of the ground in the next few years, what impact does this lack of new development have for retailer’s looking for modern up-to-date space? Will we see more refurbishment of older stock?
Sean Gillies head of retail, Savills
Historically, for retailers to increase turnover they have needed to increase their bricks and mortar. This was fairly easy to do when about 8m sq ft of new shopping development was coming online each year. However, the floorspace of new retail development to be delivered in 2012 has dropped to 3m sq ft, forcing retailers to look for alternative ways to expand.
In the 1980s a retailer needed around 400 stores on average to reach 50% of the UK population but by the early 2000s, due to better transport links, the internet, and consumers being willing to travel further to reach regionally dominant shopping destinations, this had fallen to 200 stores.
There are five main ways for a well-financed retailer to increase its turnover. They can:
? increase the price of sales
? expand into multi-channel retailing
? expand outside of the UK
? explore M&A activity, and
? increase their bricks and mortar format.
Expanding outside the UK and into multi-channel retailing has proved successful for companies such as Primark, Supergroup and TK Maxx, but most already have these strategies in place. A number of retailers are attempting to grow through M&A activity and new store formats. For example, JD Sports bought Blacks following its administration, and Edinburgh Woollen Mill have acquired Jane Norman.
These retailers are seeking well consigned stores of 4,000-6,000 sq ft throughout the UK. While the market remains challenging, some sectors and retailers remain extremely active. These sectors include food convenience stores (Tesco, Sainsbury’s, Morrisons in local), value fashion (Store 21, Select), discount sector (Poundworld, 99p Stores, Home Bargains, Poundland, JD Sports / Sports Direct).
Administrations and store closures are generally perceived as setbacks for the industry, but they can also help retailers who are trying to expand their business. The closing of Woolworths in 2008 provided many retailers with an opportunity to take large high street shops. Of the 9m sq ft of space brought to market following its collapse, only around 1m sq ft remains unlet, mostly in the smaller tertiary markets. The troubles of groups such as Peacocks and Bon Marché will provide an opportunity for the retailers above to secure new space in new markets.
The stalling of the development pipeline had been widely anticipated by leading retailers and national chains and a number had actively commenced altering their bricks and mortar format to explore new sales avenues.
In recent years retailers such as Next, H&M, TK Maxx, M&S and John Lewis have further embraced the out-of-town market. Next, for example has its mainline brand, Next at Home and Next Home and Garden. TK Maxx and John Lewis have developed Homesense and John Lewis at Home. These formats have allowed these retailers to open on the bulky goods A1 retail parks rather than the traditional open A1 parks. The out-of-town format will not work for all retailers, and a certain amount of experimentation on types of retail park and merchandise is required to ensure the future success of retailers with a younger fashion focus. This format of retailing does, however, lend itself to the click and collect format and is why retailers will persevere until they have identified the winning formula. Where town centre development has stalled we have seen a marked take-up in the out-of-town market.
London and the South East, together with the Cathedral and Spa towns nationally are the preferred locations for retailer expansion. It is highly likely that due to the space constraints we will see an increase in infill and edge of centre development to satisfy the overwhelming demand for these areas, which cannot be satisfied by the current provision.
At a glance
In the first of a new series, Noella Pio Kivlehan asks representatives from a group of specially selected companies to comment on one of the top issues of the day
Growth of on-line retailing will start to slow down as the sector matures
? For retailers wishing to expand their store portfolios, selection will be key
? Prime London and South East, along with cathedral and spa towns nationally are the preferred location for expansion
? Retailers are searching for larger unit sizes which can be accommodated by retail warehouse parks
Richard Akers, MD of retail portfolio, Land Securities
The fact that there is little development going on is very good news for us, as it puts Trinity Leeds – which is opening next spring – up there in lights. It’s a great opportunity for the new retailers that are keen to take space and have a requirement for Leeds – of which there are plenty.
And, particularly at the moment retailers’ requirements are changing, because of structural changes in the sector. Today, the importance for retailers is to make sure they have modern space which fits both their requirements for a multi-channel offering and is also attractive to customers.
Generally, however, lack of development is bad for the market because, as I’ve already said, the retail sector is changing rapidly and retailer requirements are changing with it. It is important that retail property is able to deliver the space that retailers want, and new development is one way of doing that. Lack of new development is negative to retailers in that they may be frustrated with not being able to develop their property portfolios.
Refurbishment
I do believe we will see more refurbishment, but not in the way of extensions, because most retail locations do not need additional floorspace – they need the existing floorspace to be reconfigured to meet the needs of retailers. Also, there is the question of whether older centres will be knocked down for new ones to be built in their place. This all comes down to viability, which I think is unlikely.
What is more likely is that we will see older centres which have a large number of smaller units configured to provide a smaller number of large units. This will work better for retailers and, of course, the viability of doing that depends on existing rents having fallen far enough for that transition to show an appreciable improvement in value.
There is no doubt we have seen a big change over the past five to 10 years, with falls in real disposable incomes for consumers. There has been an increased change in market share for the supermarkets, and the enormous growth in online shopping and relatively low levels of GDP growth. But looking ahead, the picture is positive for retail property because the rate of growth for the supermarkets will decrease, and online retailing will start to slow down as it becomes more mature.
Obviously, having had a period of new development has helped the picture look more positive for retail property. But it will be quite a few years before the amount of new development picks up.
Part of the reason for that is obviously lack of financing, which has made it extremely difficult for developers to develop. Development is much more likely to be carried out by major REITs or institutions rather than by traded developers.
Angela Keane, associate director, property research, Henderson
It is well documented that the amount of new retail space opening within the UK in 2012 is pretty much close to zero, a different picture to 2008, when a record 8m sq ft of shopping centre space opened. Lack of development is forecast into the near term and the result is an imbalance between supply and demand for prime space which we believe will create further pressure on rental tones for prime locations.
This has already been seen in the results of Henderson’s IPD Shopping Centre typology analysis where our segmentation of the shopping centre market highlights regional shopping centres and small prime centres, showing positive rental growth of 1.4% and 0.5% respectively in 2011, outperforming the All Shopping Centre index which continues to see negative rental growth recorded at -2.4% in 2011 (based on IPD Quarterly Index).
For those retailers still wishing to expand their store portfolios alongside new entrants from overseas, stock selection will be key, and only prime, well-sized units will do in order to drive profits from a retail market which is undergoing significant changes – namely, the internet.
With the growing importance of e-commerce, retailers are looking to expand their business online first and foremost, improving their transactional websites to drive sales through this channel. This leads to store consolidation, and we expect increased retail space to come back to the market over the next few years as retailers can now cover a wider proportion of the UK market from fewer stores.
Refurbishment
With less demand from retailers for new stores will we see refurbishment of older stock taking place? This will be very asset specific and will benefit the out-of-town market ahead of in-town space. Many retailers are searching for larger unit sizes which can be accommodated by retail warehouse parks.
The refurbishment of retail warehouse space to manipulate units is more easily achieved than in shopping centres, and therefore more likely to drive profits. Without significant retailer demand, the refurbishment of older shopping centre stock is less likely.
The IPD shopping centre index shows an initial yield gap between prime and secondary assets of more than 400 bps, this is significantly higher than the yield gap within the retail warehouse market and highlights increased secondary stock in shopping centres. We believe a significant percentage of this stock will not be refurbed and will no longer be of institutional investment grade.
Internet
One further effect of internet retailing is the growth in retailers’ multi-channel approach and the concept of click and collect. Although this is relatively new, we are aware it may affect retailers’ needs for how their physical stores are configured. This concept will create refurbishment of older stock in order for stores to facilitate changes such as click and collect or self-service style checkouts.
The lack of new retail development will drive retailer competition for best locations, creating pressure on rental tones. We will see refurbishments of older stock where the balance between supply and demand characteristics within the catchment are positive, but there remains a significant amount of stock, especially within the shopping centre market, which will not receive further investment and therefore ultimately die out.
