In the UK the retail led regeneration market has changed out of all recognition over the last 5 years. It abruptly stopped being the golden child of the listed property companies, REITs and institutional investors from 2010 onwards. This is not such a great surprise if we consider where we have all been during this period in the property cycle. Following the economic implosion of 2008/2009 retail sales plummeted, household names went into administration and secured long term income became a thing of the past. The concept of internet sales grew in popularity and more attractive external markets caught the eye.
But time is a great healer and as we all know nothing stays the same forever. Recent experience has given me much hope that the retail development market is set to return to the forefront of investor’s minds. There are several obvious reasons for this:
- The simple passing of time itself implies existing stock and older retail concepts will need to be revitalised on a large scale after years on low capital expenditure.
- The British economy overall is showing clear signs of stability. The South East thrives while a knock on effect in the Regions is becoming inevitable (ironically at the same time some of the more fertile external markets are losing their shine).
- Retailers that have adapted to the structural changes of the consumer market have got to grips with their omni-channel retail strategy. The internet has finally been seen as a compliment to High Street sales rather than a threat. The popularity of ” click and collect” and the ability to embrace 4G technology has meant savvy retailers feel comfortable with the foreseeable future and confident in forecasting sales. This allows them to think in expansion policy.
All of the above create tangible changes in perception and direct improvements in the economic environment. But what else needs to happen at grass roots level to reboot development?
It is true the majority of investor sentiment continues sceptical of development. The long lead in period to large retail development schemes does not lend itself to high return hurdles (20% IRR’s) and 3 to 5 year timeframes.
The reality is, though, that pressure is growing for modern space for new concepts. While most investors prefer to chase after a limited number of prime existing assets that are income producing and apparently risk free they push prime yields artificially low due to sheer weight of capital.
The critical factor that has changed, however, is that the public sector is now a key partner. Attitudes have changed dramatically and the level of participation of certain local authorities in the revitalisation of their own city centres is to be highly respected.
It is now becoming a growing practice for local authorities to raise funding from various different sources to promote directly and indirectly town/city centre retail led regeneration schemes.
Clear evidence of this exists at Friars Walk, Newport where Newport City Council is directly lending to the preferred developers development vehicle. In other cases the local authority is investing in site acquisition costs and/or pre development and planning costs such as Chester and Cheshire West Council and Sheffield City Council.
A small number of entrepreuneurial development companies that have built up strong working relationships with councils over recent years know they are well positioned. As it becomes clear that this is an increasingly acceptable format more local authorities join the trend. Perhaps the brief will vary from a role as development partner to that of a development manager in the early stages of scheme development. It is slightly irrelevant as the basic skill set is the same.
In this latter scenario the council may feel more empowered. It has the ability to use new exciting and experienced companies hungry for the role while keeping control of ownership until a moment in time when the market has recovered sufficiently to take advantage of a sale of part or all. This decision may be influenced by historic factors relating to previous development agreements.
Investors beware. It is at your own peril that you shy away from development funding scenarios now. Opportunities exist to partner local authorities via experienced developers/development managers on terms previously unobtainable.
Once this practice has become more widely accepted it will be too late to benefit from the current window of opportunity. Returns can be secured now at acceptable hurdle rates while simultaneously making a real difference to local communities and regional economic growth. This collateral social benefit of this at corporate level is priceless.
By Paul Sargent, Chief Executive and Co-Founder at Queensberry Real Estate