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Extinction Event? UK Shopping Centres Face Redevelopment, And That's A Good Thing

All empires crumble, all eras come to an end. Is the coronavirus pandemic the extinction event that wipes out many local shopping centres?

In some cases, it may just be the proverbial straw that broke the camel's back. A consensus is emerging that, whilst some shopping centres won't survive, the valuable town centre sites they occupy will be redeveloped rapidly, if local councils are prepared to support development.

Bisnow finds the silver lining in today's retail cloud.

The Trafford Centre

UK retail, and the shopping centres and town centres that house it, was already in a tough spot going into 2020, but the novel coronavirus outbreak has been catastrophic. The government has ordered all retailers apart from those selling essential goods like food or medical supplies to close. One retailer alone, Primark, said it would lose £650M a month in revenue. 

As a result, all retail property investors, big and small, are in the midst of a mighty rethink. Big names like Intu, currently digesting a 22% drop in property valuations, a £2B loss and an abandoned £1.5B fundraising, are already being touted as being on the "brink of collapse." Cutting service charges in the second half of 2020, intended to help hard-pressed tenants, doesn't make the numbers any easier.

Shares in listed rival Hammerson have more than halved since the end of February.

So has the moment of existential crisis arrived? 

“The shock delivered by coronavirus could, in a way, be a huge opportunity to reshape our town centres, because the truth is they haven’t been working properly for a long time,” Capital & Centric founder Adam Higgins told Bisnow.

The company is looking at the potential in Greater Manchester towns, and sees scope for residential and office development.

“Residential land values in Manchester mean the city will sort itself out, but there are prime opportunities for redeveloping shopping centres in the surrounding towns. Local authorities will have to help because even if these shopping centres are largely empty of tenants or shoppers, there will be issues like book values and debts secured on the shopping centres, and development may not stack up as a result.

“We’ve an opportunity here to reset town centres, to say that retail domination is over, to create offices and residential which will improve the footfall for the retail floor space that remains.”

Looking at rising vacancy rates, Higgins said local authorities need to hold their nerve, resist the temptation to plan in a mood of panic, and look to the medium term.

Councils Fill The Funding Gap

Merry Hill in 2009, when retail property values were so much sunnier.

A correction of the retail property market has been long overdue (and was already partly underway) before anyone knew COVID-19 existed, NewRiver Retail Chief Executive Allan Lockhart told Bisnow. Lockhart presides over a £1.3B portfolio covering 33 community shopping centres amounting to 9M SF.

“COVID-19 will mean some retailers do not survive the lockdown, so inevitably the vacancy rate in shopping centres will increase,” he said. But landlords like NewRiver were already cutting the volume of floor space to match retail spending that has diverted over the last decade, by up to 20%, from bricks-and-mortar to online.

NewRiver is already rethinking shopping centres, and reusing the land as part of town centre regeneration, at their 177K SF centre at Grays in Essex and at their 465K SF centre at Burgess Hill in Sussex, and is preparing for much wider recycling of shopping centre locations.

“We are thinking ahead, and we need to start preparing, which we can do because we largely own town centre locations which lend themselves to alternative use. We might be thinking of a reduction in our retail floor space in the low double digits percent, but if the wider high street vacancy rate is 15% and growing, it would not be unreasonable to imagine the proportion of floor space lost could be 30%,” he said.

Residential is the obvious candidate for alternative use on town-centre land. Thanks to residential land values in London and the South East, NewRiver has reported that an internal review of their entire retail portfolio revealed that its current (retail) valuations were, in November 2019, 87% underpinned by the valuation of the next-best alternative use for each of its assets. Not surprisingly, this gives Lockhart considerable confidence about abandoning shopping centres that don’t work.

“We’ve got optionality, we can invest in these sites alone or with partners, but the main challenge for alternative uses will be access to capital. And the further north you go, the more challenging the viability is because residential land values are lower,” he said.

“It will take time and money and the challenge is will the capital be made available? Local and central government have a vital role to play here, not just political support but financial support, and it will benefit their town centres.”

Don't Give Up

Intu's Lakeside shopping centre in Essex

The path ahead is not smooth. If landlords and developers can see a way through, the position of lenders is more complicated. Loan-to-value covenants make this tricky, and potentially alarming, territory for them.

More broadly, it is still too early to know if lenders decide the effort of rescuing shopping centres and their operators would be throwing good money after bad, and that the best option is to recycle shopping centre sites for alternative uses.

Evidence from the last recession suggested a high degree of patience. We may see few repeats of the kind of efforts that rescued Stockport’s 307K SF Merseyway shopping centre (placed in administration in 2009 and bought by the local council in 2016). Once is the kind of unhappy accident both investors and local councils can (just about) tolerate, but twice might feel like carelessness. Or worse.

In some cases, lenders have pulled the plug on borrowers, even before the coronavirus outbreak. German bank PBB last year appointed receivers to take control of the Houndshill shopping centre in Blackpool to facilitate a sale to the local council, in that case after loan-to-value covenants had been breached. 

But it remains to be seen how lender act distress is no longer sporadic, but almost ubiquitous. The government this week said landlords could not evict commercial tenants for three months if they did not pay their rent. Primark said it was witholding this quarter's rent from landlords, amounting to £33M. Essentially, every retailer and retail property owner in the country has had a hole blown in their income, giving banks a tough choice about which owners to back.  

In the meantime, don’t give up on the shopping centre just yet, Cushman & Wakefield Head of UK Retail Paul Durkin told Bisnow. Despite seismic structural shifts, oversupply and mismatch of floor space and a pivot to food and beverage offers that may have delivered all it can, there are reasons for hope.

Yes, he said, for some retailers the coronavirus pandemic will be the final straw. “But looking beyond the current period, a reversion to long-term trend of growth is likely, as with the removal of social distancing people actively seek to reconnect with friends and family,” he said.

“The likely impact of all this on lease terms and structures between landlord and occupier is not yet clear. The government has announced direct measures including business rates exemptions, wage support and VAT relief amongst the broader package of support available, and I expect that these measures will be kept under review to ensure that otherwise healthy retail businesses survive the pandemic.

"In the short term, individual arrangements between landlords and occupiers will require negotiation to find a financial compromise whilst premises are closed. I am encouraged that one of our collective focuses as a society is now on looking after the 3 million retail employees who may be unable to work during this difficult period."

Shopping centres have had a difficult few decades. First they had to chase off the challenge from out-of-town retail, then they fought a long and losing battle against online rivals. Could the end be in sight (and on-site) in the form of whole-sale redevelopment?