Secondary shopping centres: where can the market go?

The recent raft of reported or rumoured CVAs and retail failures is once again casting a shadow over the future of bricks and mortar retailing. Nowhere is the gloom more apparent than in secondary shopping centres. Constantin Leeb, manager at Deloitte Real Estate Consulting, highlights three pieces of analysis to think about. Net store closures [caption id="attachment_915325" align="alignright" width="150"] Constantin Leeb[/caption] “Traditional” retailers are rebalancing their footprint to mitigate the economic consequences of the continued growth of online retail, focussing increasingly on top locations. Space released has, in recent years, been filled with casual dining/leisure operators. The very public distress now evident among a number of casual dining operators suggests that this trend will not continue. This, coupled with other sectors that are known to be downsizing, such as banks and betting shops, could indicate that space may well stay vacant. Increased vacancy rates will put even more pressure on already struggling secondary shopping centres. So who will take the vacant space? And what does this mean for investors and their yields? Last year saw overall net store closures across all classes of retail stores, a trend that is projected to continue, if not accelerate. Diminishing transaction volumes and the changing ownership base The period from 2010 saw years with substantial transaction volumes in secondary shopping centres, but since an abnormal peak in 2015, both transaction volumes and prices per sq ft have dropped significantly. Traditional investors, eg banks and property companies, have sold out of this asset class to refocus on the best stock. READ MORE: Inside the reimagined department store The buyers have predominantly been pension funds, REITs, private equity and local authorities. Each of these groups will have had a different motivation for increasing their holdings (financial/non-financial/local authority regeneration), and all will need to develop their own responses to the current conditions. For those who bought into this market in anticipation of occupier recovery or a significant shift in yields, it could prove to be a long wait. Indeed, if current market sentiment is anything to go by, the new body of investors seems to be swimming against the tide. Geographical distribution of transactions Deloitte’s research suggests that the geographical distribution of the shopping centres transacted in recent years has shifted towards the south of England. This suggests that the underlying value of the land acquired, presumably for alternative use, has increasingly been factored into the equation. A sensible approach given the known demand for residential in South England and increased propensity for high street shopping centres to be transformed. More worrying though for those holding schemes in parts of the country where underlying land values are more depressed. Where can the market go? Landlords and tenants will need to work together like never before. A new rental model, turnover rents for example, that better reflects an economically sustainable cost for space will be needed to help make vacant stores more attractive. The repurposing of surplus retail space to residential (or other uses) will move up the agenda, adapting supply to changes in demand. This may, however, not be straight forward given the reliance on permitted development rights issued by local and central government as well as the added complexity of shopping centres, which are not as easy to redevelop cost effectively as an outdated office block. READ MORE: High street store openings fall to lowest level in seven years In many “secondary” or “tertiary” locations, the cost of delivery and depressed local house prices and rents may render any such strategy uneconomical. With the current macro-economic conditions and political turmoil it is difficult to forecast with confidence. Nonetheless, the stark reality is that retail stores are closing more often than they open, transaction volumes for these assets are reaching a low point, stock on the market is frequently withdrawn and only the best assets in the best locations are seemingly transacted. Waiting for recovery alone might not be the best bet.