With UK retail parks facing an increasingly perilous future, turning the sites into vibrant residential-led developments offers land owners an opportunity to bolster investment returns.
2 minute read
The pressures on UK retailers are intensifying as they are hit by rising costs, sluggish consumer spending and ever-expanding online sales. Since the turn of the year, Toys “R” Us, Maplin and Poundworld have gone into administration while others, including House of Fraser, Debenhams, Carpetright and Marks & Spencer, have closed stores.
While the majority of these brands’ outlets are primarily located in town centres, it would be wrong to conclude retailers’ woes are confined to the high street. The same forces are depressing the profitability of stores located in out-of-town retail parks. More and more retailers have found themselves trading from stores that are suddenly far too big for their needs.
From retail to residential
As the owner of a number of these sites in outer London boroughs, we are talking to various tenants with a view to redeveloping the land. In working closely with our retail clients, our objective is to help them cut their rental liabilities by converting their existing outlets into smaller formats that are more appropriate for today’s retail environment. The aim is to boost sales densities and improve the profitability of their operations.
By building a sizeable number of residential units on each of these sites - a large percentage of which will be genuinely ‘affordable’ - such developments can simultaneously help to meet London’s ambitious new housing targets.
From our perspective, although well-let, well-located schemes should continue to deliver decent returns, investing in many retail parks now carries increasing risk. With retailers unwilling to take out leases of more than ten years, and in many cases longer than five – compared with the 25-year leases most parks were designed for – downward pressure on rental income looks inexorable.
By repositioning such sites, there is an opportunity to at least mitigate some of this downside risk and deliver investment returns that are sustainable over the long term.
The fact Mayor of London Sadiq Khan, under his Draft London Plan, is set to scrap density limits in a bid to double the rate of housebuilding in the capital, adds to the potential benefits of redeveloping these sites.
Planning and cooperation
Investors need to consider a number of factors when considering the merits of redevelopment. It is firstly important to avoid protracted planning applications, which have become the norm in London. The ability to provide housing on existing sites, rather than going into ‘Green Belt’ land, are added advantages since this should help ease the path of the schemes through the planning process in view of environmental concerns.
It is also important investors work in close cooperation with their existing retail clients to cut the risk of the development as much as possible. For example, by reaching agreement with existing retail clients, investors will continue to receive their rental payments right up to the moment constructors break ground. If we are putting them back into the redeveloped scheme, these income streams will recommence as soon as the building is completed.
From the retailer’s perspective they have got greater certainty since they know well in advance when they will be vacating the premises. And they go back into newly-developed modern premises fit for their new offer that should be complementary to their online operations, with plenty of prospective customers on their doorstep.
Most projects are likely to contain flexible working space, tapping into the growing market for this kind of office space, and could also include a doctor’s surgery, a library, or some other space suitable for use by the local community.
According to research consultancy Property Market Analysis, retail parks in London and the south east of England that are sufficiently large to be converted into this type of mixed-use development, occupy around 24 million square feet of land. We estimate that land could be used to create upwards of 170,000 new dwellings.
As the owner of a number of these larger retail sites, we are conscious of the need to work in close cooperation with local authorities as they will have a keen interest in these development projects given the large amount of land each park occupies.
By securing their agreement, land owners have an opportunity to create a positive legacy for all stakeholders, through vibrant developments that will be at the heart of the local community, while at the same time generating sustainable long-term returns.