Defying the odds – Shopping Centre turnaround

Posted by Ellandi on 4th Oct 2018

Julie Pears, Head of Future Places at Ellandi, joined a panel discussion at the EG Finance and Asset Management summit recently to debate the initiatives landlords are employing to enhance asset value, against a backdrop of retail doom and gloom.  

Here are some of the questions that were covered.  

Are there malls that just aren’t possible to turn around? Do they just need to be knocked down?

Ellandi has carried out research with CACI which demonstrates that the UK retail provision is over spaced by 17%, with 49% of shopping centres being over spaced.  Where there is overprovision in a town we predict that provided there is a masterplan strategy to rationalise the retail provision, yes, we may see shopping centres knocked down. This begs the question as to who is best placed to manage these opportunities, and one of the reasons why we are seeing an increasing number of local authorities taking the bold step to purchase shopping centres within their boundaries.  

At Ellandi we have recognised that it will be important to deliver the change necessary and shape these future places to ensure their vibrancy and attraction.  This could include office, retail, leisure - boutique cinemas can now fit into units with ceiling heights of 4.5m -  pop up offers, curation of independents, food halls, hotels and civic uses, from council offices to health centres and libraries.  

Within the Ellandi portfolio, which comprises over 30 community and convenience centres, demand for retail has been more resilient than most, but in the future, some may benefit from being part re-purposed, as structural change continues to adversely affect the requirement for retail space.  However, being at the heart of their communities, any re-purposing of an Ellandi centre is likely to always include a convenience offer appropriate and relevant to that community.   

What are the most successful asset management initiatives that you have implemented over the past year or seen and why and how did they work?

Ellandi has committed to providing workspace in certain centres.  It makes sense to invest in employment uses in town centres. For retail locations to remain vibrant, they need to be combined with essential civic services and wider business amenities.

Castlegate Shopping Centre in Stockton is providing a Business Centre, ideal for independent businesses or those from larger businesses in the wider area, who need a central location with flexible terms.  The creative business space offers a contemporary design suitable for hot desking, or offices for 1 to 6 people, as well as bespoke space.  

At the Marlands Shopping Centre in Southampton, 12,500 sq ft of vacant retail space on the second floor of the centre including part of the Dunnes department store, is being re-purposed into a co-working space.  The site is well located in the city centre close to the train station and other transport hubs and will create space to nurture new and growing businesses.  With a digital technology industry estimated to be worth £2.1bn and employing nearly 30,000 people in the city, there is a clear need for the right type of space to enable the tech sector to continue to grow at the rapid pace of recent years.  This co-working space will support and retain local talent and attract entrepreneurs to the city, which will benefit everyone locally.  The co-working model has the greatest synergies with the shopping centre, attracting different workers during varying times of the day, and week.  

Does it make sense to knock a centre down?

It really depends on where the centre lies in terms of generating income.  If little or no value is being derived, indeed if it is costing the investor in rates and service charge such that the liabilities outweigh the income, then knocking it down may be an option.  However, there are examples where re-purposing by using the existing structure may be a more cost-effective route and certainly more sustainable!  

What does the perfect community shopping centre look like?

Most landlords purport to have centres at the heart of their communities, At Ellandi we believe that the shopping centre should be at the heart of the community, well connected in terms of accessibility in the traditional sense of transport, accessible and affordable car parking to facilitate frequent visits, but also socially and economically, and by that we mean nurturing local identity, heritage, and local prosperity

  • Promoting good health and wellbeing – a number of Ellandi centres now include gyms and the increased footfall associated has been up to 15%
  • Promoting inclusivity, such as dementia-friendly training, adult changing places, shop mobility. 

Our intercept surveys reveal that a community centre is underpinned by the following characteristics

  • 80% visit weekly.
  • 79% travel less than 20 minutes to the centre
  • Online shopping does not significantly impact visitation.
  • Trips are largely needs based essential goods  

Therefore, the offer has a strong emphasis on convenience (grocery) goods, retail services and convenience driven food and beverage, but an important element is fashion, comparison and homeware, which tend to be value or discount-driven, for which the cost of delivery and last mile logistics don’t stack up for providing an e-commerce solution.   

Furthermore, independent retailers are more prevalent in these centres and often have less of an online offer, thereby encouraging people to visit the stores.  

How do you make sure that you are getting on board occupiers that are most likely to be paying their rent long term?

Ellandi collects data directly from retailers or agency activity.  Combined with market-leading research data houses such as CACI, this provides an unsurpassed understanding of tenant performance metrics. The combination of data on turnover, sales densities, gives us an insight into sustainable rental levels.  

What has been most interesting about the retail failures, is that they have often been private equity backed.  For those companies that see retailing as simply a cash cow, without the requisite investment in this changing retail landscape, then we are going to see more failures.  The privately-owned retailers appear to be handling the storm better.  

Where Ellandi have had some national retail and restaurant failures, we are looking at local independents to replace them, especially in the food and beverage market where local operators more fully understand the market.  An independently run café bar has opened at  White River Place in  St Austell, selling local cheeses, beer from the St Austell Brewery, and local gins, for example.  

Is residential the answer?

There appear to be compelling reasons why residential use is possibly one of the first asset classes to consider when seeking to enhance the value of a shopping centre asset;-

  • Intensification by building in the airspace is attractive as the retail is still maintained and the residential population can assist in sustaining the retail provision perhaps.
  • Local authorities are under pressure to meet their housing targets.
  • There is pressure on the green belt, and town centre locations have been proven to be the most sustainable locations for residential development.  

However, despite this positive landscape, viability can be challenging.  It is helpful that Homes England are being supported by the government and it will be interesting to see how this translates to towns and cities.  

How do you judge a centre as an investment opportunity first up and its catchment etc?

A centre must have a clear purpose. It is not enough to have fully let space and a range of shops – it needs to engage the visitor.  

There is not a single asset class, location or centre mix that is guaranteed to succeed or fail. The centres that work have a proposition that is aligned with the customer, do what they do well and most importantly connect with their customer and community. Whether it’s a destination regional mall, city centre or a smaller community scheme it is about connection.  

To work successfully the retail must be tailored to suit the needs of the catchment and be the right size for its location.  With 49% of centres in the UK being over spaced, in a market of about 2700 retail locations identified that means around 1300 locations are currently over spaced compared to catchment demand.  These are typically of an average retail mix (the squeezed middle), often in the shadow of bigger centres or in a competitive landscape with lots of diverse retail. We tend to see a high proportion of retail floorspace in these locations occupied by struggling department stores. These types of locations have continued to lose market share as they fail to compete on the polarisation spectrum, neither a destination regional mall or community scheme.  

Identifying purpose will be the challenge in turning many of these town centres around, but the opportunity to start to bring traditional town centre uses – civic, health, offices, residential, culture -  back into the centre can help in establishing that purpose.  It’s no longer all about retail.  

Will retail get to a point where it is so cheap that some schemes become viable again?

If you mean yields moving out to double-digit, I think we have to be very careful about analysing the income stream, and the sustainability of a “cheap” centre given competition.  It may seem viable to purchase and cash – generative, but will it be value accretive?  Does that centre have a long-term sustainable purpose?  

Will we see genuine distress from landlords soon? Is it happening already?

There are likely to be pockets of distress.  There is not a market shift like 2008, but where loans fall due refinancing is becoming more difficult against the backdrop of falling valuations.  Many Private Equity owners are unwilling to put fresh equity in to refinance or cure.  

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