Retail into residential: Could coronavirus spur on more development?

Housing delivery remains high on the government’s agenda, so landowners and developers remain under pressure to intensify the use of their land which could lead to multi-use, multi-storey developments. Several shopping centre owners are continuing to explore proposals that would see the delivery of thousands of new homes at their sites, through repurposing car parks and redeveloping other elements of their schemes.

Development proposals will ultimately go beyond the model of re-providing retail space, historically supermarkets, on the ground floor of a residential scheme. Instead, developers will adopt more innovative designs to create residential in place of or alongside existing uses. Key to the design process is establishing a phased approach to allow continued income and avoid having to pay existing tenants to break their lease.

It is then to be seen how large institutional investors choose to capitalise on the proposals, opting to develop themselves, dispose of the opportunity or procure a delivery partner. With larger landlords who have multiple sites the option to procure a delivery partner presents huge opportunities to create a new asset class for their portfolio and learn from a residential specialist.

“With the ongoing problems in the retail sector we have seen a number of large investors looking to increase their asset value and income,” said James Keegan, partner at Knight Frank. “The majority of retail centres are underutilised and by creating residential through innovative design both the asset value and risk profile are improved. Often build to rent is the preferred residential tenure as it can be retained and generates an income stream much like a traditional commercial asset. We are also beginning to see more industrial companies looking at ‘beds over sheds’ which has huge potential. Given the market is relatively quiet now, it is the perfect time to undertake the necessary feasibility studies.”

As well as shopping centres, developers are also looking at repurposing retail parks. While they used to appeal to retailers due to their cheaper rents and bigger units, in recent years they too have suffered from the wider retail downturn.

In the 12 months to December 2019, retail warehouse capital value growth has declined by 12.86%, according to MSCI (formerly IPD).

But redeveloping retail schemes into residential destinations is not without its challenges.

As Stephen Springham, head of retail research at Knight Frank, commented: “Over-supply is one of the clear structural challenges facing the retail market. Reducing the overall retail footprint nationally would result in a leaner, more fit-for-purpose retail market. 

“But re-purposing space in an over-supplied market in favour of under-supplied ones (such as residential) may appear a no-brainer, the reality is far more nuanced, with geography being a key divide. Retail over-supply is at its highest in towns and areas where there may be limited residential demand. There is also the issue of inflated retail values - only in areas where there is some modicum of parity of values between retail and residential (broadly within the M25 and certain towns in the South East) will repurposing stack up financially, if the full costs of re-development, including demolition, are factored in.

“There are undoubtedly opportunities to repurpose retail space to other uses – but a forensic, cross-sector perspective is a pre-requisite for unlocking them.”