A raft of administrations has left landlords with empty big-box units including some that are difficult to re-let. Alex Lawson finds out what can be done to entice retailers and consumers to them.

After administrations such as Focus DIY there are dozens of empty units

The past few years have been a difficult time for some big-box UK retailers. A lethal combination of weak consumer spending and particular corporate problems have caused trouble for a clutch of retailers and left landlords with units to fill. The growth of online retail and Tesco’s admission earlier this year that some of its stores are bigger than they need to be has also thrown out-of-town retail space firmly into the spotlight.

High-profile administrations including MFI, Focus DIY, and Allied Carpets left landlords with dozens of empty big-box stores, and many of the empty units have proven difficult to fill.

Rob Asbury, head of retail and leisure at property consultancy Montagu Evans, believes that poor strategy has been the key factor in the administration of several businesses. But there are other factors at play as well. UK administrations, which also included Land of Leather, have been accompanied by a trend for retailers to downsize. As highlighted by Tesco and reinforced by a slowdown in planned expansion by Sainsbury’s and Morrisons, the space race is finally slowing after two decades of rapid out-of-town growth, particularly in food.

Research by property analyst Trevor Wood Associates reveals that the quality of the properties available as a result of this downturn is variable. The Definitive Guide to Retail & Leisure Parks 2012 reveals that a contraction in new development has led to a shortage of prime retail space. As a result, the best existing empty units are snapped up, although research shows there are still locations where property has remained difficult to let for some years.

The research also highlights some interesting regional trends. For instance, in 2009, Yorkshire had the highest retail warehousing vacancy rate, at 14% in the second quarter. However, just two and a half years later it is the third lowest, with an 8.4% void rate. Meanwhile, vacancies have remained static in the Southeast since 2006 and increased from 7.8% to 11.6% in Wales. The vacancy rate in Northern Ireland has improved, from 14% in 2006 to 9.5% in 2011.

Retailers are also becoming more demanding. They want the space they pay for to work hard, and many are reviewing their existing estate and seeking to increase the value per sq ft of each store. This can lead to deals such as Wickes’ agreement to rent space to other retailers including Pets at Home. Kingfisher has also said it is reviewing its store estate to assess the optimum store size. The DIY giant may also rent empty units near to its existing stores, because it wants more space in areas it knows are profitable, and where the demographics chime well with its offer.

The big appeal

A tightening of planning laws within the National Planning Policy Framework, reworked and slimmed down in March, to more explicitly favour in-town development has also had a part to play in dictating demand for empty retail units. The tighter planning laws have made existing out-of-town units more appealing to retailers, because they have already been approved for retail use. Leisure has also increased in importance – a number of landlords with empty units on their hands will hope an adjacent cinema could boost footfall and demand for property in retail parks.

Alastair Crowdy, national head of planning, development and regeneration at property consultant GL Hearn, says: “Empty units are an issue, particularly for older generation parks, outside the Southeast. Planners have to rework consents to allow a wider range of goods to be sold. Some leisure is coming forward, and food and beverage businesses are possible future uses.” But, he adds, retail is still a more profitable use of space than, for instance, building residential units. He says: “Particularly outside the Southeast, the value differential between retail and other uses suggests that it is worth trying to improve the fortunes of a retail park, rather than pursuing alternative uses.”

One key growth sector is the discounters. Since the UK first entered recession in 2008, discounters including German grocers Aldi and Lidl as well as non-food retailers including Poundland, Poundworld, Sports Direct, The Range and Wilkinson have all been on the hunt to top up their store portfolio. “The discounters, once the haunt solely of the of the lower classes and poorer income families have now become respectable to the middle classes, who are much more value driven and discerning shoppers,” says Asbury. Discounters’ tight margins mean they seek low rents, capped or fixed rent reviews and long rent-free periods or high capital incentives. “Landlords are prepared to accept this in return for having the unit occupied by a retailer who they think will survive in today’s recessionary time and with a guaranteed income stream in place,” explains Asbury.

Short and sweet

As well as discounters, the rise in temporary retailers both in and out of town has been a notable trend in the last five years. Retailers including Trading Bargains, FW Home Store, Computers for Africa, Lee Longlands Clearance and Litecraft.co.uk are among those to have taken short lets in retail units to generate a short burst in trading. “The arrangement works well for landlords, who minimise short-term liabilities, and the tenant, who is either able to clear excess stock or test the market without long-term liability. There are currently about eight units occupied in this way,” says Trevor Wood.

Opportunism is not just confined to temporary retailers. One of the most significant out-of-town deals this year was the acquisition of 10 former Best Buy stores by Morrisons-owned baby etailer Kiddicare in January. The pounce by Kiddicare could set in motion a trend for a number of pure-play operators to seek a small store estate as they consider adopting a multichannel approach. Landlords will also keep a keen eye on retailers that have a stated intention to expand out of town, including Dobbies Garden Centres, Sports Direct and Next, which is on the hunt for further locations for its home and garden format.

However, landlords may have to look beyond traditional retail to fill some empty units. With transport links to retail parks traditionally very strong, units could interest commercial customers looking for warehouse premises as well as self-storage firms, which – particularly in London where space is at a premium –  continue to thrive.

Ultimately, the market appears capable of coping with the re-letting of retail units as long the numbers remain manageable and too much space isn’t released on to the market simultaneously. “Landlords are resilient people and where there are vacancies in portfolios, asset managers will be forced to look at reconfiguring units, varying planning consents to appeal to a wider market or possibly redeveloping in extreme cases for alternative uses including leisure,” says Asbury. It’s a challenge, but not insurmountable. Locations that are well linked by road networks and good footfall and lower rents will always be appealing to retailers.

Warehouse vacancy rates in the UK

Warehouse vacancy rates in the UK