Analysis: Breathing new life into secondary malls

After years of moribund activity in the secondary shopping centres market, investors have started to pick up malls across the country. Attracted by a mix of pricing, yields and a sense that the worst of the administrations, closures and online sales erosion may be behind them, these new owners are hungry for space to revamp and reposition.

“There have undoubtedly been opportunities for value acquisitions in the UK secondary market and I think we might be on the verge of far more,” predicts James Boyd-Phillips, head of retail asset management at LaSalle Investment Management. “The market is becoming of interest as investors see potential.”

While the ownership of secondary malls was hardly the sort of stuff to set the heartbeat of most retailers beating in the past, this time round it’s far more significant, as new buyers demonstrate they’ve got money to invest.

“Many owners of secondary centres were well in breach of their loan to value covenants and had the operational income to keep the centres going, but no cash flow to invest,” says James Findlater, partner at Briant Champion Long. “If those buying are able to achieve the sort of prices that allow them to invest then they can do the sensible things which improve a centre for consumers and make a mall more desirable for retailers.”

Capital & Regional managing director Mark Bourgeois agrees: “There’s no doubt that many centres have suffered from under-investment. Pre-2008 it was a case of malls going up in value regardless, and after 2008 there was an unwillingness to spend. Given the cheapness of borrowing and a rebasing that has seen yields out at 8% to 10% it’s much easier to justify investment. If you then develop a scheme there is the opportunity to grow rents sustainably, although it still has to be the right centre.”

Neil Varnham, managing director of retail asset management firm Pradera, observes: “The current situation is a complex mosaic. For investors there are secondary centres that look like good value, but some are simply managing
a declining income flow and it’s about picking the winners from the losers.

“Having a strong asset management team is absolutely essential. Too many landlords still seem to think that taking on a leasing agent means they have covered off asset management, when really it’s about the tenant mix,
affordability, marketing and communications if you want to keep a mall vibrant.”

Room for movement

So what does this new interest in secondary centres mean for retailers? While much has been made of the desire to trade from bigger boxes - and chopping and changing a centre can help to create that sort of space - the main difference is that new owners have more headroom to decide what is best for a scheme.

Bourgeois cites Redditch, where Capital & Regional and Oaktree Capital Management bought Kingfisher Shopping Centre, inheriting a shuttered TJ Hughes store. “We had the impetus to take a ‘nil value’ unit, reconfigure it and put in four restaurants and a gym, which are a major benefit to the wholescheme,” he says.

“There does seem to be a more mixed approach to the size of units. There are still those looking for larger space, for example, we’re putting in 20,000 sq ft units for H&M and Next at the back of the Waterside Centre in Lincoln, but the trend is not only towards larger units.”

Other issues have become hot potatoes, notably car parking. “I think you’ll see more landlords reduce or abandon car parking charges as they see that the loss in income is more than compensated by the increase in sales,” predicts Findlater, while Ross Campbell, director of retail for property services firm DTZ, says car parking is now one of the hottest topics regarding town centre schemes.

“Obviously it’s not just the landlord’s responsibility, often it’s the council but we are seeing some movement on pricing. It’s not just about costs though. In the big schemes you tend to whisk into the car parks and local centres need to be as accessible as possible.”

The tenant mix is also changing. “Because debt rates are low and yields are high, there is quite a big differential for an investor. It means that temporary vacancies can be managed and this also provides more working capital to carry out asset management,” says John Griffin, investment director at Lunson Mitchenall.

“For some of the major fashion retailers it’s not even about space requirements, it’s just that they have markets they are no longer interested in. So the key is to do something different and to re-evaluate the tenant mix. Food has become increasingly important and the value retailers such as B&M and Home Bargains are aggressive space takers and a new broom for the shopping centre market.”

Boyd-Phillips agrees, pointing out the mass of potential at the value end of the market. “We’ve done deals with the likes of Home Bargains, which is very acquisitive and is a good footfall driver. And with B&M we feel there is lot further to go in this sector and value is where we are focusing a lot of our efforts,” he says.

Secondary centres need to establish themselves as a community hub, according to Varnham, which means more leisure if possible, food, mixed use and residential. “An investor buying a centre now would probably envisage it looking very different in five years’ time - really you need to look at malls as if they are department stores and manage them in that context. I’d also advocate embracing and helping start-ups, helping smaller retailers understand shopfits and visual merchandising, and aiming to bring that vitality and point of difference to the mall,” he says.

Campbell maintains that understanding this shift is fundamental. “Retail is always evolving and this is where the change is taking place - the fashion stores are unlikely to be looking for space but the discounters and the value fashion retailers are still expanding, providing the rental rates are in line with their needs.”

Challenges to come

However, even with a keen asset management plan, reconfiguring and repositioning a mall will not be easy in the current market conditions, warns André James, head of national investment at Colliers. “It is still very tough on the occupational side. Retailers want two years’ rent free, two years of contributions to their capital costs - they are there to do deals.

“Expansion is largely coming from the likes of Wilkinson, especially in the Southeast, B&M and Home Bargains and the pound-style chains,” he reflects. “There are also plenty of schemes running at a discount low enough to suggest that they can be asset-managed and enhanced over a three-to-five-year period, which is what’s attracting investors.”

The landlords also need help, says Ed Cooke, director of policy and public affairs at the BCSC. “Secondary rents have come down, service charges are being actively managed but business rates are a huge barrier to occupants taking space and, especially in secondary centres, for landlords there is the risk of empty rates costs.”

For this new breed of owners, proving that many of the UK’s ailing malls still have life left in them is their biggest challenge. They might bring the financial potential to reshape and reprofile the secondary market, but in order to succeed that money will need to be spent wisely.