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Time for asset managers to show their mettle

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It’s 2006, and it’s a crazy, crazy world.

Yield compression, strong retailer demand from expanding national chains and new arrivals to the UK are all fuelled by rapid economic growth and easy access to finance. An asset manager’s biggest challenge was to hide their embarrassment at the level of performance fees they were earning!

During the heady heights of the retail property boom life was just, well, simpler — and why not?

The term “best practice” focused on basic tenant engineering: renewal of lease terms nearing expiry, negotiation of rental values — upward only, of course — and perhaps spending some of the surplus revenue generated on bland mall refurbishments.

Landlords were all powerful and leases would be adhered to religiously by the retailer for fear of having its prime pitch ripped from its possession for non-compliance and given to the next tenant seeking representation within the scheme.

Seven-year hitch

Well, times have changed somewhat, and the approach needed to successfully asset manage a shopping centre today bears little to no resemblance to that of seven years ago.

Tenants laugh in the face of contractual commitments, while negotiating rental discounts and reminding landlords that they are lucky that they are not one of the 54 retailers to fail in 2012, or the 31 from the previous 12 months.

Units can sit vacant for what seems an eternity, and temporary lets to “£1” shops, pop-up stores and other discounters seem to be the only way to reduce exposure to ever-increasing void costs.

In these centres that fall into the “secondary” category, the time has come to move away from a purely financial-based asset management model backed up by spreadsheet analysis alone. Asset management needs to move towards a more operational — dare I say it, more “entrepreneurial” approach. It is no longer about market sector yields improving and masking the inherent defects in flawed assets, while consumers spend frantically, having more access to excessive credit than good sense.

Everything in the world today has come back to basic fundamentals. In retail property terms, this means in many cases looking at your assets as though they were potential development sites — stripping away all the superfluous layers and coming to grips with the basic offer you have and the demand being generated in your catchment area.

You cannot ignore the physical constraints of your property but you can surely challenge them to the limit. Ask yourself whether the asset could be smaller, larger, higher, lower or totally reconfigured. Should it be repositioned,rebranded or possibly changed to another use?

These are both frightening and challenging questions, but now is the time to take the most unpopular of all decisions and correct the errors of the past, unlocking potential for the future.

It is time to admit “the emperor wears no clothes” to stop the rot.

Many existing shopping centres are simply not suited to their current catchment needs — after all, they were conceived and built more than 20 years ago in an era before online or supermarket monopolies.

With ever-increasing challenges on our high streets and with multichannel retailing growing yearly, the only response acceptable is a firm and concise one.

Yes, we need to look at existing centres and respect their structures and the existing lease profiles that generate net income, but also be ruthless and innovative in applying both design solutions and technological improvements to future proof assets from further decline.

This will ensure they can resist and then thrive when the inevitable uplift occurs in the long-awaited global economic recovery. This skill set, which I believe all developers should possess, allows us to suitably visualise physical changes, redevelopment opportunities and changing retailer requirements.

The good retail developers among us have, as a matter of course, been monitoring retail trends, piecing together retailer requirement puzzles, creating a more visceral shopping experience, and generally problem solving for decades.

The time has come for developers to stand up and be counted — to evolve and take the next step into the competitive and demanding sector of asset management, and make difficult decisions in difficult times doing what they do best: creating long-term and sustainable value.