Combining retail with homes and offices

The economic recovery and resulting rise in consumer confidence has set tills ringing across the UK’s high streets and shopping centres. At the same time the retail property market has enjoyed a similar surge, with assets worth more than £10 billion changing hands last year – a 51 per cent rise compared with 2012, according to one calculation.

Demand for retail properties continues to mount, with institutional and foreign investors displaying particular interest in the same way that UK residential property is regarded as a safe place for Russian, Chinese and other wealthy foreigners.

The sector has many attractions, says Darren Yates, head of global capital markets research at Knight Frank, as it is well regulated, highly liquid, and the UK is an easy and corruption-free place to do business.

Although retail property took longer than the office and logistics sectors to bounce back after the recession, London in particular has become a magnet for investors. Along with the prime shopping districts, such as Oxford, Regent and Bond streets, the adjoining thoroughfares and streets in nearby Mayfair have also benefitted with rents rising steeply in recent months.

Outside the booming capital, the picture is more complicated. Mr Yates argues that the rise of online shopping means retail destinations are failing into one of two categories – places people have to go, and those where they want to visit.

Including a residential component in plans for a new store is often a requirement to win planning permission

The winners, he says, are large city centres, tourist destinations such as Edinburgh, Bath and York, “experiences” such as factory outlet villages and big regional shopping centres such as Bluewater in Kent.

Landlords of these shopping meccas need to “focus on improving the consumer experience, dwell times and boosting the leisure components” such as cinemas and food outlets, Mr Yates says.

He believes small town centres will continue to struggle because retailers want modern, well-appointed stores. “A lot of towns in their current format don’t really work and it’s going to be many years until many of these empty shops are filled. Structural change has happened so quickly on a massive scale that everyone seems to have been caught out by it, especially landlords of shops on high streets,” he says.

Supermarket chains are also having to adapt their property and store portfolios to the new retail environment. After building hundreds of out-of-town superstores, many consumers have reacted to having fewer pounds in their pockets by buying food as they need it, rather than making one weekly trip.

Tesco has responded by adding Giraffe restaurants and Harris + Hoole cafés to dozens of its largest stores, to occupy some of the floor space now deemed to be surplus to requirements and make them more of a “destination”.

Sainsbury’s modified plans for a new 80,000-square-foot supermarket in Wolverhampton by incorporating space for a gym within the development. Dean Clegg, its director of property, says: “It’s about looking at future investments through a slightly different lens – the 100,000sq-ft out-of-town supermarket probably is a thing of the past. You want leisure spaces or other things in those developments as well.”

The company is seeking to maximise value from its property portfolio by embarking on a number of mixed-use ventures. The first was in Wandsworth, south-west London, where a joint venture with Land Securities has doubled the size of the existing Sainsbury’s store to 76,000sq ft, created additional retail space for tenants, such as Sports Direct, and also added a 120-room Premier Inn above the store.

Sainsbury’s has two other similar schemes underway in the capital, Mr Clegg says. In conjunction with Barratt Homes, it is building an 80,000sq-ft supermarket in Fulham which will also include 464 apartments due for completion next April.

A more ambitious project is in Nine Elms, south London, close to the Battersea Power Station regeneration zone, where a similar-sized store will open in late-2016 along with more than 700 dwellings in three high-rise towers.

Other mixed-use schemes involving Sainsbury’s can be found on the site of the former MG Rover plant in Longbridge, Birmingham, which includes a new college, and at Tottenham, north-west London.

The benefits for supermarket chains are obvious, with thousands of residents providing an instant source of footfall. Mr Clegg says such ventures also increase shareholder value, as well as improving its offer to customers and facilities for the local community. Including a residential component in plans for a new store is often a requirement to win planning permission, Mr Yates adds.

Managing property holdings, both freehold and leasehold, for the big four supermarkets has become considerably more complex in recent years given the rise of the convenience store. Sainsbury’s now has 600 of its Sainsbury’s Local stores – more than its total number of conventionally sized supermarkets – and is opening two a week.

Some might argue that the growth of online across the retail sector could render the physical store obsolete sooner or later and leave many landlords burnt. Mr Yates disagrees, insisting that, as online sales start to level off in some categories at just under a quarter of the total, stores will remain a vital piece of the retail jigsaw.

While many shoppers now research potential purchases online, plenty still want to try on a pair of shoes before they buy. Click and collect will also become more important as retailers seek to minimise costly home deliveries. “Stores will be here to stay,” Mr Yates contends.