In a difficult market and with big-box units falling out of favour, retail parks are having to find new and innovative ways to operate to maintain investment values. Mark Faithfull looks at how landlords are facing up to some tough decisions

The retail park market was already being worked hard, but ever since the once-booming DIY sector put the brakes on expansion, bulky goods and traditional retail park sites have had to innovate to retain and enhance their value.

Yet, despite the break-up of larger units, the introduction of mezzanines, new smaller pod units targeting high street retailers and food and beverage operators, and even the inclusion of leisure and residential elements, the prevailing climate just keeps getting colder.

The heyday of the big box has probably passed and the high-profile casualties of the past couple of years are still evident in voids. Consumer confidence was down, too, but when the sub-prime crisis swept over from the US, the problems bubbling under the surface were brought sharply into focus and landlords with half a mind to sell their way out of their troubles found themselves with severely downgraded assets.

The market has been destabilised further because retail funds have been hit by individual investors flooding out of property forcing the funds to sell assets at a time when prices were bumping along the bottom.

So does this spell another year of doom and gloom for landlords? Atisreal head of retail Ian Parish believes that it depends on the park, its consent and its position locally, but says: “For 10 years we have had little but good news. That has come to a grinding halt and bulky goods is in the most difficult state.”

But he also believes that the forced selling has cooled off. “Property companies have been a bit more resilient than institutional investors and most are sticking it out, but the market is really in need of more entrants to out-of-town retail,” he says. “Some high street retailers are still looking to start or to increase, their presence but then the operator has to explain why the extra money per square foot is good value.”

Atisreal head of investment Paul Griffiths says: “Most retail funds have finished selling to achieve their redemptions and the availability of parks and stronger yields based on slower rental growth is encouraging some institutional investors to look again.”

DTZ director and head of warehousing Marcus Wood agrees. “The present situation has compelled everyone to reappraise, because the price of risk has increased massively, as has the cost of debt,” he says. “In the past two years, the weight of money coming into the market has almost forced the industry to ignore the warning signs. In some ways, the position now allows owners to use the repricing to look at their parks again. We are urging clients to reinvest in their parks so that they do not deteriorate and, particularly, that they do not become secondary schemes.”

Duncan Good, partner at Edgerley Simpson Howe and Partners, says: “Since the new year, vendors’ aspirations have been more closely matched with levels that purchasers are willing and able to reach and we have seen an increase in the number of deals.”

He believes this has translated into more optimism. “So far, in 2008, the buyers have been well-funded property companies and private individuals, but with institutional redemptions slowing considerably and a general feeling that the price correction better reflects the occupational market, a number of funds are preparing to re-enter the investment market,” he says. “There will be no quick return to the levels of 2006, but the market does appear to be turning a corner.”

This view is also supported by Henderson head of asset management for retail warehousing Jamie Johnson. “The occupational side has remained quite good and, until the end of last year, things were pretty active,” he says. “However, retail decisions have become much more opportunistic and there is a lack of entrants. Whole Foods Market has been making noises about out-of-town because it is struggling to find sites, but what the market really needs is a big high street fashion chain to go out-of-town.”

Internal affairs

Operators need to focus internally on what is provided on site. “We have focused on the commercialisation of our sites, which means bringing in revenue from different streams,” says Johnson. “For sites with prominent positions, we have erected advertising hoardings, added car washes and tried to maximise the use of the space. This not only brings in new revenue, but also adds to the feel of the scheme.”

However, for all the enhancements, the retail park sector has inherent issues that make real innovation difficult compared with high streets and shopping centres, says The Mall chief executive Ken Ford. “A lot of what we do is based around after-sales – like the marketing and promotion of our centres. It’s much more difficult to persuade a big-box retailer to contribute to a marketing budget. Similarly, we can take a long-term view on encouraging a regional or new retailer in – right down to starting them off with a cart. At a retail park, the sheer size of the units puts up a big barrier to entry.”

Retailers may be thankful that the strong landlord market has finally come to an end, but shaky consumer confidence has tempered the joy of holding the upper hand. Edgerley Simpson Howe and Partners associate partner Jason Holden says: “The days of retailers being enticed by three months rent-free are over; they are looking for longer rent-free periods, improved specifications and cash incentives.”

Parish agrees. “Retailers are being more aggressive,” he says. “But even in bulky goods there is still some activity. Homebase and Wickes are still acquiring sites and Aldi and Lidl, which are becoming more established, are also looking at out-of-town sites.”

“There are structural issues, too,” adds Wood. “The traditional furniture market is in a cyclical downturn, but, in that same market, you have the home offers of Bhs, TK Maxx, Home Store + More and Tesco, as well as new players, such as Jysk. The market is still there, it is simply changing. Similarly, consumer electricals has been hit by the internet. Operators need to be developing units as showrooms, with collection points for internet orders and free parking. If you operate a secondary scheme with electricals retailers and do nothing, before long, those retailers are going to start questioning the amount of space they are taking.”

This all means that new site development has all but stopped, even for solus sites. Griffiths says: “Typically, in a deal to forward-fund a new unit, developers would agree to buy land at historical values. The appraisals on those sites don’t stack up now and I think we’ll see property companies concentrating on redevelopment. In fact, some of the older parks built during the 1980s have far more flexible consents than the newer parks and offer more opportunities.”

Land Securities head of retail parks Dominic O’Rourke agrees and says that the high level of Open A1 in the company’s portfolio has provided “more room for manoeuvre”. He adds: “I believe our parks have been good value for money, which increases their sustainability. Generally, things have been better than on the investment side and food stores in particular are holding up well. And there are still development opportunities; we’re working with Sainsbury’s on new sites. We have to remember that out-of-town has been a very successful format and is a pretty robust sector.”

Investment returns

Jones Lang LaSalle director of retail Stuart Anderson believes that a sense of perspective is needed. “Retail parks have not been any more affected by the credit crisis than any other property sector. With an element of repricing and on sites with 6 per cent yields, we are seeing investors back in the market. At the moment, it is probably easier to turn off the development fund, rework old sites and downsize units.”

And there are flickering signs of activity. Goodman recently bought Tower Retail Park at Crayford, in Bexley, through its Goodman UK Retail Parks Trust on a yield of 5 per cent. “We are considering opportunities for similar structured deals to this one, as well as opening the trust up to new external equity,” says Goodman Property Investors managing director John O’Connor.

Despite this, analysts remain far gloomier about secondary parks and, so, the doomsday scenario – requiring a complete rethink – cannot be ruled out.

“Landlords are taking stock and examining what needs to be done to prevent a void or to reinvest in units and what the potential impact on the park or their returns will be,” says Wood. “But there is still nothing wrong with traditional parks if you have a good position and strong covenants.”

King Sturge retail warehousing partner Mark Rudman echoes that view. “Sometimes, too much is made of secondary locations. If you have a fully let site, then rental growth may be difficult, but the situation is fine. With voids, the operator has to look at the advantages of rejigging and enticing new anchors.”

He also believes that the sophistication of mixed-development projects now makes these viable. “Residential and leisure can add a lot and may be required given present planning requirements,” he points out. “Gone are the days when developers struggled to deliver.”

Wood says: “For any scheme inside the M25, there is a residential opportunity and possibly the introduction of A1 and A3 uses depending on the consent. The real challenge is at secondary sites where residential land is not highly priced. There are solutions, but none are particularly happy ones. I would be looking to swallow the pill and take the opportunities if there are upsides and, if there are not, to price that in now.”

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