Development of major new retail space has all but stalled, leaving UK retailers chasing a dwindling supply of large, prime space. Mark Faithfull asks whether the imbalance will force expansion strategies to change.
It’s not as though the UK retail industry has been caught by surprise. For more than 18 months all the talk was of the only three major shopping centre openings in 2011 – Parkway in Newbury, Trinity Walk in Wakefield and Westfield Stratford City. And even then, with the latter being a mega scheme it was something of a one-off.
What’s more, the next significant scheme – Trinity Leeds – is not scheduled to open until early 2013. Following this, there is hardly a cascade of new retail space.
Of course, the current state of the high street would suggest that a slowdown in development is no bad thing. UK retail floor space is about 177.6 million sq ft across about 700 schemes, with a total gross lettable area (GLA) per 1,000 inhabitants of 2,847 sq ft – very much in line with the EU-15 average of 2,829 sq ft per 1,000 people. The problem is that much of the available space is the wrong kind of property: wrong location, wrong size, wrong situation. Bigger units in prime and important retail centres are what pretty much all that the smart money is chasing and that’s the sort of space that a more typical pipeline would be feeding.
According to property agency Cushman & Wakefield, just 500,538 sq ft of new shopping centre space was added to the market in the first half of 2011, with Westfield Stratford City accounting for 81% of the 2.3 million sq ft, which opened in the second half of the year.
The 2012 pipeline is all but in deep freeze, currently standing at about 199,000 sq ft, the lowest annual increase in provision since the 1950s.
With little contemporary stock coming to market, Land Securities managing director for retail Richard Akers believes some tougher decisions will have to be made within shopping centres if the impasse is to be at least partly breached. “It’s fairly obvious that there is a shortage of opportunities and that space in prime centres is all but fully let. Although in the slightly longer term there will be more provision in the next three to five years, that is not solving the current issue,” he says.
Taking control
Akers believes that for the situation to change, retailers must be prepared for greater landlord activity in the tenant mix, although he concedes it may not be palatable to retailers. “I’ve argued for some time that landlords should have more control over the mix and should be able to move out or downsize underperforming retailers. I appreciate that retailers do not like the idea of handing over control, but it would enable landlords to take back space and adapt it for the specific needs of stronger performers, which would also keep the centres fresher,” he says.
He adds that it works very well in the designer outlet market. At Gunwharf Quays in Portsmouth, for instance, it changes about 15% to 20% of the retailer and food and beverage mix every year.
But Akers also warns that for a landlord to take back space, accept it as non-income generating during adaption and spend capital refurbishing it, there must be an upside. “Inevitably in these economic times, for an incoming retailer that means the new store must generate more equivalent rent when it’s completed,” he stresses.
Given the focus on prime space, it is perhaps unsurprising that it is many of the larger schemes that are extending or looking for growth opportunities. Land Securities pushed the button on its delayed Trinity Leeds scheme last year, while Hammerson was given the go-ahead in December last year for its long-awaited £200m retail development at the Manor Walks shopping centre in Cramlington, Northumberland, again after plans were delayed during the recession. The 1.25 million sq ft scheme will include the refurbishment and extension of the Westmorland retail park, the construction of a new nine-screen multiplex cinema and leisure facilities, new bars and restaurants, plus improved links with the adjacent Manor Walks shopping centre.
Elsewhere, Parkway in Newbury, Trinity Walk in Wakefield and the retail element of the mixed-use Cube scheme in Birmingham added retail space last year, Bluewater also opened its events venue towards the end of 2011, while Meadowhall is being extended and this year Brewery Square in Dorchester will all contribute some contemporary space.
“There is a strong market for the right space, in the right locations, in the right towns,” says Rob Williams, head of retail development, Strutt & Parker. “A lot of space going forward is going to be out-of-town, but that takes in a wide range of sites, such as edge-of-town, plus big-box on low-value land, where rents can be made more affordable.”
Williams also questions whether current planning and zoning systems are keeping pace with the reality of retail and leisure development in the UK and asks whether a number of “very British” practices will survive in a rapidly changing world. “Quite how the next 12 to 18 months will go will probably be dictated by the first quarter of 2012 and the view about expansion coming from the retailers,” he says. “We’re at a point in time, trying to work out how we go forward. What will probably distinguish the current period from 2008/2009 is that the large high street space that became available when the likes of Woolworths went into administration will not become available this time round.”
A change in space
Lakeside in Thurrock is another major shopping destination hoping to bring more contemporary space to the market. Capital Shopping Centres asset management director Jonathan Ainsley says the company is looking at asset management strategies across its estate of 14 shopping centres, believing that the current space shortfall will throw up opportunities to offer multi-location, larger units to expanding retailers or those coming in from outside the UK.
“At Lakeside there has been a lot of pent-up demand – there hasn’t been a planning regime in place since the Development Corporation masterplan for the basin in 2008. The main catalysts are wider expansion,” he says.
Capital Shopping Centres has been working with the Borough Council and the Development Corporation for about five years and although the Development Corporation ceased to exist at the end of March, it has accepted the submission and the council will now take it up, says Ainsley. “Hopefully construction will start as early as 2013.”
As a 21-year-old scheme, Ainsley reflects that the type of space and use now being put forward is in contrast to what was constructed for its opening. “We’re working on larger box space first, then a department store, then MSUs [medium-sized units] and normal-sized shops, with the mall extended at the upper and lower levels,” he says. He adds that throughout the 21 years it has been a mix of evolution and expansion, but the difference is that at the beginning it was very much about the interiors, but now with the extension there is more of a focus on the exterior, with stores and restaurants facing outwards.
Supply of space in the longer term appears less of an issue. Cushman & Wakefield retail partner Toby Sykes is one of many who believes that new development will gradually begin to pick up pace. Cushman & Wakefield predicts an upswing in development activity towards 2015. The key for developers, he says, is not to oversupply and to ensure that new space is designed to meet specific retailer requirements. “There is definitely more of an appetite for development in the market. In the meantime, we are advising on extensions to existing schemes to satisfy market demand and to improve tenant mix,” he says.
But the immediate disconnect between the space available and the space required shows few signs of abating. There is little evidence that retailers thwarted in their efforts to cherry pick sites are lowering their aspiration from prime and becoming more flexible about the better end of secondary. Instead, many growth plans are on hold. Ultimately, the concern for physical retail remains that the deadlock may instead redirect more investment not into new-style stores, but online.
An opportunity for the high street?
While the current debate about available space and desirable space has been focused heavily on the ailing UK high street, a pinch point could be approaching that would bring retail back to town, says Jones Lang LaSalle head of retail development Charles Miller.
While complex and fractured ownership has been a historical barrier to town centre redevelopment and master-planning, preventing significant chunks of real estate from being reformatted into bigger space, plummeting capital costs and increasing voids could open up opportunities. “Town centre retail has probably never been as cheap and it has not got that much further to go before the idea of buying parades and refurbishing them or even knocking them down and rebuilding them could become attractive to investors,” he says.
While Miller concedes that such new space “will not come online overnight”, refurbishing brownfield sites would create new space far more quickly than developing a new shopping centre. He says: “There is a political will to bring retail back into towns, property prices are getting cheaper, a scheme may well be able to benefit from existing local authority car parking and a good tenant mix would be very appealing to financiers.” He adds that the priority used to be an abundance of pre-lets and strong guaranteed income from rents, but now backers also favour projects where there is little risk. “An urban scheme combining an anchor, comparison shopping, medium-sized units and a food store would be very appealing,” he says.
Food for thought
Food and beverage operators, like retailers, are “chomping at the bit” for space in prime shopping centres says Tracey Mills, development director of leisure property adviser The Coffer Group. She adds that the major operators have had to forge strong relationships with mall owners to find the space they need. “There are ways of creating new space and a lot of innovation is going into the sector,” she says. “Many shopping centres have been created with voids at a higher level, which can in fact be filled in and used to introduce new food offers without reducing light levels in the centres.”
Mills also cites more flexible offers such as sushi, which does not require cooking facilities, and says there are ways of introducing food and beverage offers that can complement and bolster specific elements of a mall. For instance, a sushi unit next to an upscale department store can help to create a more upmarket feel to an area within a mall, says Mills.
Food operators have the same issues of constricted bank finance, of course, but there is a lot of venture capital money out there, she adds. She points to Wagamama, which, with its backers, has a commitment to open 200 stores in the UK.
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