Technological developments are driving change in the UK retail sector, a trend with significant implications for retail park investors, says Jonathan Bayfield.
3 minute read
Shoppers’ expectations are altering radically in the UK as technology continues to raise the bar on product information, price comparisons, customer support and delivery options. Meanwhile, e-commerce has jettisoned many issues related to physical retailing, including transport and time costs, issues finding products and lack of customer support.
Clearly, there will be winners and losers across retail types throughout the UK as a result of these developments, with significant consequences for real estate investors. Sustained investment performance in retail warehousing will most likely be achieved by identifying locations that offer experience-led, high engagement retailing.
Our expectation is car ownership will decrease over time as car sharing and taxis become the norm. In addition, most parks are characterised by low engagement retailing and they are not necessarily places people would choose to spend their free time. As a result, many retail parks will struggle to compete with e-commerce, auto replenishment and auto fulfilment.
To survive in this environment, retail parks will need to significantly broaden their offering to become more appealing destinations. As occupiers deploy multi-channel strategies, they will continue to locate in places with high footfall and the potential to enhance brands. Places that have unique characteristics and can offer engaging experiences will be most likely to survive.
New occupiers will broaden appeal
New types of tenant will be needed. A retailing offer that matches the catchment’s demographics will boost customer appeal and engagement. Traditionally, retail park occupiers have sold electronic and/or bulky goods. These sectors have a higher exposure to online retailing. Occupiers will need to sell high engagement products with the potential to offer interactive and personalised experiences. For example, DIY and home improvement retailers will need to embrace technology, incorporating virtual reality. Increased and improved leisure, food and beverage provision, or even the fusion of retail and leisure parks, will also become more normal.
Retail parks are characterised by low land costs and large amounts of space. Therefore, unique physical experiences like ‘competitive socialising’, including golf and climbing walls, and other dynamic activities may take space.
Scale is critical when looking to create a strong retail and leisure destination. Greater scale implies more consumer choice and a wider offer. Overall there will be a bias towards the major cities and regional shopping destinations. Manchester is a good example. It has a very strong food and beverage presence and is host to a broad range of retailers who look well placed to offer high levels of future customer engagement. Landlords of retail parks will need to have large adaptable sites to compete with strong centres in cities and regional shopping centres. Smaller retail locations will generally struggle to establish themselves as destinations for high-engagement retailing.
In recent years, many fashion operators have migrated from town centres to retail parks. Retailers have consolidated stores and benefitted from lower occupancy costs. Crucially, landlords must be experts in specific catchments so they understand the overall retail landscape, including local demographics. This will allow investors to better take advantage of changing occupier requirements.
Considerable opportunity for repositioning
The majority of parks are currently underdeveloped in terms of experiential retailing. This suggests a significant opportunity for repositioning. Landlords must ensure that retail line-ups are both compelling and fresh so shoppers keep returning. As a result, some may have to totally re-configure if the current space does not match requirements. Varied two-sided street retail centres, such as Whiteley Village in Hampshire, instantly create a more attractive destination; an example of refashioning a ‘town centre offer’ in an edge of town location. However, the adaptability of sites is a key requirement to implement such changes.
Historically, easy car access and free parking provided retail parks with a convenience factor that was difficult to replicate. This clearly is less important given the rapid rise of e-commerce. One redevelopment model might be a hybrid pick-up and delivery retail centre, incorporating drive-throughs, pick-up lockers, and smaller traditional stores, as well as a last-mile fulfilment facility.
Other redevelopments in the residential and/or offices sector could be considered on appropriate sites. The aim would be to deliver a more rounded, mixed-use scheme, with the retail component likely consisting of traditional convenience stores and food and beverage operators. Land values will clearly be the driver of this strategy for landlords. Currently this will only be feasible in London and the South East, where values are higher.
Strategic implications for investors
Total returns for many retail warehouses in the UK currently look relatively high compared to other parts of the market. Income is therefore only likely to be sustainable in the short to medium term.
Although well-let, well-located schemes should continue to deliver strong income returns, over the longer-term sales will leak online, to in-town locations and to super-regional malls. The reduction in the relative importance of convenience means investing in many retail parks will carry increasing risk.