A wave of administrations marked the start of another tough year, but what is the real picture and how will retail property fare in 2013?

Whiteley shopping centre is being redeveloped after previously failing as a factory outlet

There was a time when the collapse of a retailer the size of HMV would have sent shockwaves across the industry. A grand old name on the British high street, it stood strong for decades while all around it other retail brands came and went.

But after five years of tough high street conditions and the online revolution gaining in strength, it wasn’t surprising when HMV went into administration in January. Retail property directors will know only too well the pain the board will have gone through before that decision was necessary and, before the end of the year, more may face similar difficulties.

In many ways, HMV’s tale is a telling chapter from a bigger retail story and one that reveals much about the outlook and challenges for retail property over the next 12 months.

With a portfolio that grew to make it one of the most ubiquitous brands on the high street, HMV’s expansion was typical of the pre-crash, pre-internet days. Skip forward to 2013 and that has become a dangerous position to be in according to Nick Symons, partner at property agent MMX Retail.

“Most retailers just don’t need 300 stores any more,” he explains. “For the retailers with large mature portfolios that reflect the historic retail scene in the UK, where they have stores in every retail location, the question is
now about the profitability of the bottom 30% and possibly how you remove those stores.”

It’s a far cry from the days when a property director’s priority was expansion pure and simple. In 2013, expansion is likely to be limited to a small number of retailers, and on the rare occasions where the space available is just right.

That selective approach will create more concentrated portfolios with fewer locations being considered, says Westfield UK director of operations Bill Giouroukos.

He maintains: “Retailers will continue to close down stores and focus on upmarket locations - they have to change to meet customer needs.

“There’s been an oversupply of stores and there was always going to be a shakeout. It’s just market forces at work and now there will be a continuous refinement in portfolios.”

Giouroukos expects an increase in demand for stand-out shopping centres, meaning that “marginal areas” will need to reinvent themselves to survive.

Meanwhile, the “continuous refinement” that he refers to means more store closures, potentially on a large scale across the country. The national retail portfolio has already shrunk significantly with void rates remaining at about 11% - the latest round of administrations, which also includes Comet and Jessops, means yet more space is being fed back into the market.

Not all doom and gloom

Amid the gloom, however, there are some bright spots across the retail property market, as a number of new shopping centres are due to open this year. Developers Land Securities and British Land are both on course for big project completions in the coming months and, elsewhere, Tesco has also turned its hand to shopping centre development.

Trinity Leeds opens in March after development was halted in 2009

Trinity Leeds opens in March after development was halted in 2009

Land Securities’ Trinity Leeds is the largest of the new schemes and is the type of ambitious city-centre project that at first seems to belong to the pre-crash era. But proving there is still life in the retail property market, the 1 million sq ft development is back on track after being halted in 2009 due to the severity of the recession affecting retailer appetite for new space.

Anchored by Primark and Marks & Spencer, the centre opens in March and will bring some big retail names to Leeds including Hollister, Fossil, Mango and Victoria’s Secret, and Apple looks likely to take space.

It’s no mean feat in such tough conditions but it is not the only project that Land Securities is pushing forward just now. Its redevelopment of 185-221 Buchanan Street in Glasgow is also due for a March opening.

Meanwhile, Tesco’s mixed-use New Square Scheme in West Bromwich, due to open in June, is the result of a complex 10-year project but it will bring an extra 473,000 sq ft of retail and leisure space to the centre of the West Midlands town.

So far 65% pre-let, it will feature a 139,000 sq ft Tesco Extra and a 50,000 sq ft Primark store. New Square will be a new home for Next and JD Sports as well as having 36,000 sq ft of leisure space including an Odeon cinema.

The scheme was a long time in the planning stage but Jonathan Simpson, corporate affairs manager at Tesco, is confident it will be worth the wait for West Bromwich. “We’re really excited that this is going to be such a big addition to the town,” he says. “It’s going to have a huge impact on West Bromwich. It’s going to bring people in and retain them - at the moment there’s a lot of leakage.”

Delivering of new space

Richard Akers, executive director of Land Securities, believes that the progress of such developments is more than just a positive sign for the retail property market - he calls them an “absolute necessity” for retailing as a whole.

He says: “The delivery of new space is very important. The fact that there’s such little development going on is a negative issue for retail as there are still some retailers who want to expand, albeit cautiously.”

That said, Akers concedes that new developments are not the only way for retailers to get their hands on the types of units they need. “A lot of new supply could come from reconfigured space, but that requires shopping centre owners to put in the capital,” he says. “A lot of them are owned by banks, which are not prepared to put capital in.”

The Whiteley shopping centre, between Portsmouth and Southampton, is an example of such a remodelling. The scheme, due to open this year, was a failing factory outlet centre that has been reborn thanks to investment in reconfiguring the space by British Land.

Demand for space from international retailers looking to break into the UK market also remains a key area of growth for retail property. James Ebel, director at agency Harper Dennis Hobbs, who has worked on deals to bring a number of international retailers to the UK, believes there will also be a high level of interest, particularly in London, but he admits that the UK’s magnetic pull on international brands is not as strong as it has been.

“International interest in London remains very high. If you’re a luxury retailer you can’t look anywhere else, they always go for the premium locations,” he says. “But they’re more cautious than they were a couple of years ago. The occupancy cost is very high in the UK compared with other markets. Rates, taxes and rents are the big concerns.”

Chinese retailers are reported to be targeting London for expansion in 2013, according to a recent report by Jones Lang LaSalle, which covered 250 companies, while US fashion brand J Crew has confirmed that its first UK store - its first shop outside the US - will open this year.

J Crew chief executive Millard Drexler described the strategy as an “easy decision” when the move was announced. However, upmarket US furniture brand Crate & Barrel has been far more reticent. Originally expected to move into the UK in 2011, plans were stalled, although it is understood it may be back on the agenda for 2013.

While new schemes and retailers are a boon to the UK property market, there is much work to be done in improving other aspects, such as dealing with high void rates.

A solution may mean some tough but necessary decision-making by local authorities and town planners.

“There has been an oversupply of shops in the UK,” says Ben Grose, head of retail asset management at British Land. “Retailers are becoming much more selective about the locations they move into. The lesser locations will become obsolete.

“Town centres need to look at their supply and understand what is a sustainable level of retail and, in some cases, they need to think about change of use strategies.”

Fulfilling retailers’ needs

As retail space reduces, it is vital that the lines of communication are kept open between landlords and those retailers that are considering taking new units. Akers explains: “Overall there’s a shrinking national retail portfolio, but there are retailers taking more space and the fact that they have requirements means that the property community will be trying very hard to fulfil them.”

Where expansion is not an option, retailers need to ensure they are effectively managing their existing portfolio. Symons says: “Retailers need to ask themselves ‘how many stores do we need, in what locations, and what lease terms?’ It’s about working out how you can end up with a lean portfolio.”

Sadly, it is inevitable that there will be more retail failures in another tough year, and speculation is rife in property circles about the next big name to go. What is clear is that a large ubiquitous portfolio is no longer fit for the modern age - downturn or no downturn. Symons says: “Retailers just aren’t expanding in the same way as they did in the 1990s - there aren’t the large volume acquisitions.”

That combined with weak consumer spend and the inevitable forward march of ecommerce means that the retailers’ requirements are changing. Giouroukos says: “We don’t know where the next economic cycle is going to take us, and nobody’s crystal ball is perfect.”

New schemes, remodelling old space and entry of new brands are small but significant developments and must not be seen as stopgap initiatives while the market awaits the return of the status quo. The days of expansion at any cost have long gone and are unlikely to be seen again for some time.

Whiteley, British Land

Among the few schemes due to be completed this year is, perhaps fittingly, a redevelopment.

A failing factory outlet between Portsmouth and Southampton is to be reborn as the Whiteley shopping centre, with 320,000 sq ft of new space, much of which has already been let. Among the takers are Next, H&M, River Island and Marks & Spencer.

Part of the reason it has pulled in an impressive retail line-up, says British Land head of retail asset management Ben Grose, is the dearth of new shopping centre space elsewhere.

He explains: “Retailers are very concerned about the limited floor space coming on stream. Prospects are very good at Whiteley, partly because there is such a limited development pipeline. At Whiteley, we’re developing something high end. It’s a new generation in retail development.”