Retail’s Trash, Other Sectors’ Treasure?
How do the major regional UK centres rate in terms of retail over-supply?
5 minutes to read
Without question, retail is an oversupplied market. This was abundantly clear even before COVID-19 made its unwelcome arrival and the pandemic has merely served to expose the full scale of the issue. Whether retail over-supply is a direct result of the growth of online or a by-product of overzealous development in the past is largely a moot point. The simple fact is that many towns and cities have too much retail floorspace and this now presents major repurposing opportunities for other real estate uses.
To understand local supply and a town’s overall retail health, we typically employ three datasets/methodologies: 1. Vacancy rates. 2. Rental performance (2010-2020). 3. Space productivity (£ per sq ft).
1. Vacancy Rates
Vacant units are the most obvious physical manifestation of oversupply and the logical starting point for any re-purposing play. National retail vacancy rates are currently 15.8%. Generally, towns with vacancy rates <10% may be regarded as being in relatively good health. Those with vacancy rates >20% generally display signs of distress. Of the major regional cities Exeter (12.6%), Lancaster (12.8%) and Edinburgh have the lowest vacancy rates, with Hull (26.9%) Bradford (30.8%) and Newport (35.4%) at the opposite end of the spectrum. It is very hard to argue against any of these three being over-supplied on the retail side.
2. Rental Performance
Rental performance is based upon prime zone A rent movements over a ten-year period (2010-2020). Clearly, the greater the rebasing, the higher the correlation to underperformance and potential oversupply. Across the UK, prime zone A rents have declined by an average of around -30% over the past decade. Perhaps surprisingly, of the regional cities Plymouth and Hull have proved the most resilient in rental terms over the last decade, with Glasgow also seeing a decline of just -2%. Correction has been far more severe in Bournemouth (-63%), Newport (-65%) and Wrexham (-67%). With retail values tumbling in parallel with these rental declines, the economics of repurposing are increasingly likely to stack up in these locations.
3. Space Productivity
Space productivity is arguably the most revealing metric of all. It is calculated by dividing modelled comparison goods spend made in each centre by overall retail floorspace. A high figure indicates healthy levels of sales density/space productivity; a low figure indicates poor performance and/or oversupply. In layman’s terms, it is a measure of how hard that retail floorspace is working.
The unweighted average across the major UK centres is £227 per sq ft. Of the UK regional cities, a pre St James Edinburgh achieved £665/sq ft, the second-highest rate of productivity in the UK behind Oxford (£685/sq ft). Glasgow (£611/sq ft), Leeds (£584/sq ft) and Manchester (£578/sq ft) all feature in the Top 10 nationally. In contrast, Swindon (£148/sq ft), Newport (£146/sq ft), Wrexham (£123/sq ft) and Gloucester (£118/sq ft) are all operating off a very low sales density – by extension, the case for reducing the overall retail footprint and exploring repurposing plays is a compelling one in each of these locations.
So much for the theory, what of the practice and real-life examples?
The reality is that the whole retail re-purposing drive is still in its infancy. Very few projects have been completed as yet, although the number entering the planning stage is accelerating. Unsurprisingly, many of the most advanced re-purposing plays are former department stores. The demise of Debenhams has left 180 large-scale voids totalling more than 13m sq ft across the country. Smaller in scale, the CVA of House of Fraser has also seen a number of large footprint sites come to the market.
In the major regional cities, the re-purposing solution is often a straight switch to offices. Good examples of this include L&G’s consented conversion of the former Rackhams department store in central Birmingham as a 640,000 sq ft office-led scheme. Sister HoF store Kendals in Manchester is poised to undergo a similar transformation, as in all likelihood, will the former Debenhams on nearby Market Street.
Away from the major cities, the potential solutions are more nuanced, with offices not necessarily the most viable alternative. Residential and specialist commercial uses are increasingly coming into play. For example, Hammerson has submitted plans to convert the former Debenhams store in its Highcross scheme to 338 apartments for rent. In Gloucester, the former Debenhams store is to be redeveloped into a campus for the University of Gloucester.
But in many respects, freestanding, vacant department stores are very much the ‘low hanging fruit’ and realistically, the closest developers will have to ‘quick wins’. The reality is that most retail re-purposing plays will be far more complex and many will simply not be viable.
The four great divides: hurdles to retail repurposing
We have previously identified four key divides that have to be crossed before any retail repurposing becomes viable. First, geographies have to align – town centres that are most challenged and have the highest retail vacancy rates are not necessarily those with high demand from other uses. Second, planning obstacles must be overcome, although radical planning reforms introduced in September 2020 have made the process considerably smoother. Third, the retail floorspace has to be configured appropriately. A free-standing block or part of a shopping centre that easily detaches from the rest of the scheme is infinitely more “repurposeable” than small, scattered, high street units with disparate ownerships (the mainstay of vacancy in most cities). Fourth – and crucially – values have to stack up to make repurposing financially viable. And despite its challenges and significant re-basing, the value of retail real estate is still much higher than other property classes in many locations. Most or indeed all four of these stars have to align for conversion to be feasible and financially viable.
Final thoughts
The demise of retail in certain locations will undoubtedly give rise to gilt-edged opportunities for other real estate sub-sectors in most of our regional towns and cities. But most of these will be complex, long-term and capital-intensive plays. Many may require 3rd party financial intervention, particularly from councils and local authorities. And above all else, there is no ‘one size fits all’ solution to retail over-supply. All our regional towns and cities are unique and have their own story to tell. Their property needs are inherently different.
Sources: Knight Frank, PMA, CACI