Round table report: insights into the dynamics of the retail property market

A panel of experts joined TheBusinessDesk.com alongside leading prop-tech firm Nimbus, to discuss the current state of the retail real estate market.

The impact of COVID-19

There is no doubt that COVID-19 accelerated the demise of the high street but also forced landlords, councils, and tenants to look at how to diversify their offerings. The city and town centre are now being regenerated into mixed-use schemes to create new leisure destinations, whilst out-of-town locations continue to thrive due to easy access with better quality and more specialised offerings.

Businesses have looked to adapt and change the profile of their retail footprint, often taking smaller units in the town centre and larger units in the out-of-town retail parks.

Richard Jones, director of sales and leasing for retail at Avison Young, hasn’t seen bricks and mortar shops on the high street bounce back from the pandemic as the rationalisation continues.

He said: “A lot of retailers on the high street chose to focus on a smaller group of stores around better quality locations in the city centre. There have been disposal programmes where retailers are then taking bigger spaces to showcase their goods in the city rather than the high street. More people are coming to cities because of the bigger array of products
that’s just not on the high street.

“Covid did make people shop a bit more locally and I think some of the shopping parades did quite well on the back of that”.

But for those that haven’t changed their offering, there have been a raft of closures and administrations of some of the biggest brands on the high street as retailers have struggled to adapt to the changing marketplace.

Tweedie also said working together with property managers and advisors is what supports landlord and tenant relationships, especially when faced with company voluntary arrangements (CVAs).

Opportunity on the High Street

Whilst it has been a challenging period, Doug Tweedie, Head of Birmingham Office for Fisher Hargreaves Proctor (FHP) says there is occupational demand from independent retailers and people are prepared to listen to advice, with opportunity created from class E and repurposing of uppers in a market where rents are largely being re-based. Consumer shopping habits post-COVID saw a move to people wanting to support local businesses.

For Ed Siddall-Jones, director of commercial agency Siddall Jones, the independent retail market has been doing “really well”.

He said: “Local retail parades and streets do really well from independent businesses. In my little village now, people drop their kids off at school and go for a coffee or they’ll get their hair cut – we didn’t have that previously because people weren’t working from home.

“We’ve had this resurgence of localised shopping and people, I think, tend to support an independent business more than brands.

“There’s a lot of flexibility from the seller’s side. On localised at the moment, six years with a three-year break option is pretty typical”.

The Role of the EPC and ESG agenda in retail

In many property sectors, EPCs have become a hot topic, but in retail as rating targets continue to move, so does the opinion of who should tackle the job.

“Five years ago, there was a lot of headbutting on EPC ratings,” said Rachel Lawler, partner in DWF’s retail team.

“Landlords felt it was the tenant’s responsibility and occupiers said it was the landlord’s responsibility. Now, tenants have their own ESG strategies. They know that they have to work with landlords but don’t want to be railroaded by landlords.

“If there isn’t a proper collaboration with both parties putting their hands in their pockets, then I think tenants are more willing to accept things like that”.

But for Simon Morris, Managing Partner at GCW, EPC ratings in the retail market are “not an issue”.

He believes, “nobody wants to pick up the cost. That’s the issue. Any of us involved in leasing here, I don’t think any of us would have been asked what the EPC rating of this property is.

“For owners and funds, it’s important that they impose an EPC minimum standard obligation on the tenant in the lease because they need to fulfil their ESG obligations in terms of ownership. They’re very concerned about the liquidity of the asset and who’ll buy it.

For Morris, the fragmented ownership of most of the high street makes this issue even harder to solve.

“For the majority of buyers and if we think about the market that we’re in, it’s just not funds. Buyers don’t care as much [about EPCs] as the existing owners, but also if you look at shopping centres, how on earth are you going to move a shopping centre to be A or B-rated? There’s just not enough capital that you can throw at it”.

In order to drive change in this area, Morris feels that “you’ve got to find a way of getting the consumer engaged with the issue.

“There are lots of people out there right now who say they want to know the provenance and supply chain around these products to make sure that there’s no slavery involved and to see if it’s organic. But whose sales are rising the most at the moment? It’s Temu and Shein. Consumers are more interested in price over provenance”.

Tweedie said that the retail market is not like the office market, where “Grade C might be worth £15 per sq ft and A rated might by £30. There’s not that disconnect between rent, it’s always the same regardless of the EPC rating. Tenants are mostly fixated on service charges”.

GCW is currently doing a project for Dunelm on its town sites. Morris says, “they cannot get their heads around the service charge. They are used to £1 or 50p per foot and now you’re looking at £15/£16/£18”.

The role of turnover rents

Turnover rents are a way that tenants pay only a proportion of the amount they turnover in a unit to the landlord for rent, regardless of what the open market value of the property is.

Sean Prigmore, retail director at Lambert Smith Hampton however said that the issue of agreeing on turnover rents can be complex and issues arise over agreeing on the figures and access to sensible comparable evidence.

“You can ask a retailer who would like a turnover deal to give you the turnover figures of five or six comparable stores in the region and they will say ‘no’.

“Then the client will ask us what they’re going to turn over and you’re saying well, anecdotally, we think it could be this or could be that.

“A pattern has been imposed by certain CVAs because the turnover percentages 10-15 years ago were 8 or 10% of turnover. Now it’s more like 6% of the gross or net and the nuances involved when negotiating these trade deals with larger groups is quite bulky”.

“There’s not a perfect answer for a lot of occupiers” believes Tweedie as landlord and tenant don’t share risk together equally. The tenant is happy paying a turnover rent when it suits them but not when they are trading well and paying rent above market value.

Taking the example of JD Sports, “there was a time where they were paying two and a half times market rent on a turnover lease and they were absolutely fighting their landlords to try and change it”.

This isn’t the case everywhere though. A place where turnover rents have been successful in the retail market is in factory outlets.

“Factory outlets like Bicester will say this is the turnover basis and that’s not negotiable. This is what we do and there’s the door if you don’t want to do things how we do them,” said Prigmore.

The additional benefit of this model is that the cost of entry for occupiers in an outlet centre is much lower given they’re largely fitted units.

“Lots of European shopping centre models run on that basis where a more fitted box is provided,” says Morris.

“If you go back onto ESG of the unit, then the landlord has got better control over improving that. It means that you reduce occupier costs going in and can create short-term and flexible leases, which is what seems to be what occupiers are driving for”.

Longevity in out-of-town retail

An area of the retail market that has boomed is out-of-town retail parks, but Morris asked what will happen to these assets, due to the reduction in people taking their driving tests.

He said: “Out of town is a really efficient big space that is historically cheap and very accessible. But if you look at where driving licence uptake is going, which is one direction – down – what’s going to happen in 10/15 years, is that those places stop being as accessible.

“We can say transport as a service and automation will improve but the character of a place is still in its town centre, but how do you make them relevant? How do you overcome that fragmentation?”

Retail as it was 50 years ago

Jones believes that there’s an opportunity for town centres to become community hubs again, as they were 50 years ago.

With the introduction of class E it means that our high streets are now seeing a resurgence in take from doctors, dentists, nurseries and other community uses that historically have been driven out of the high street.

“We do a lot of work with councils, and they are more amenable to promoting more community uses and are prepared to give discounts to attract communities into space. There is collaboration there, but it depends on who the parties are.

“Landlords are looking at what needs to be added to our shopping centres, that’s a bit more of an added value rather than just a rent”.

Retail and Leisure as a destination

Many councils such as Wolverhampton, are assessing their offering to create mixed-use destinations, but what needs to come first? Residential or retail and leisure?

“A lot of regeneration does revolve around residential,” says Tweedie. “It centres on the residential values that are thrown up in the end. Take Gracechurch Shopping Centre in Sutton Coldfield for example.

“We’ve taken a big shopping centre and split it into two and the fortunate thing is that the residential value is such that it underpins a certain value.

“Developers on smaller schemes could put in 50, 100 units to test the waters and then try and replicate on a bigger scale”.

The issue is that the residential units need the buzz of the retail and leisure operators for them to sell well, but the retail and leisure operators need the occupants of the residential units to drive trade. And hence which comes first, the chicken or the egg?