The retail market has changed rapidly for the worse as the UK economy has toughened, but new developments are still letting well. John Ryan investigates the apparent paradox

In case you’ve had your head buried in the sand, things are not as many might wish them to be. The spectre of stagflation is likely to see a combination of spiralling pay claims and factory-gate prices creating the perfect storm. Or at least that’s the version of events that those charged with filling the business columns of national newspapers seem to delight in providing.

On this reckoning, things do look bad and if you are in the business of retail you might consider yourself to be in the eye of the storm. From a retail property perspective, therefore, it would be reasonable to assume that prospects must be pretty gloomy.

It doesn’t seem so long since every week produced another report detailing the millions of square feet of new retail space due to come on-stream before the end of the decade and how this was being added to on an almost daily basis. Most of this seemed to be comprised of new shopping centre developments or extensions and, according to CB Richard Ellis’s (CBRE) report Shopping Centres In The Pipeline June 2008, last year was the high-water mark for new shopping centre schemes in the pipeline. Indeed, by the third quarter of last year close to 6 million sq ft (557,000 sq m) of space was due to launch onto the UK’s retail landscape.

Given perceptions about the direction the economy is heading in, logic would suggest that the brakes might have been put on a fair proportion of these schemes and that the pipeline would now be considerably emptier. Yet the same report from CBRE shows only a very marginal decline. There is 5.91 million sq ft of space in the pipeline for the first quarter, down from 5.95 million sq ft in the third quarter of last year.

However, these figures flatter to deceive. The shopping centre pipeline is in fact comprised of proposed schemes, those with planning consent and those under construction. For practical purposes, therefore, it should be those under construction that are subject to the closest scrutiny, because these are the ones that are certain to emerge at some point.

Viewed this way, the evidence begins to fit more snugly with the economic facts. The CBRE survey notes that “committed schemes, particularly those under construction, will continue, but a marked decline in development activity is expected to set in during 2008-2009, with completion levels falling back sharply towards the end of the decade”.

But do the figures support the views of developers, agents and retailers, and what effect is this kind of projection having on attitudes within the sector?

Cushman & Wakefield global head of retail John Strachan says: “I was quite sceptical about the scale of the pipeline 18 months to two years ago. People with experience from other eras will tell you that not everything makes it from the drawing board.” He says that developers are re-evaluating future schemes and that delays will be inevitable. “I think, in some places, the viability [of schemes] is being questioned. In very strong markets people tend to make optimistic decisions.”

This is tantamount to saying there is a new actuality and that we are on the verge of a dose of shopping centre Darwinism in which only the strongest new schemes will end up touting for tenants, while others will fall by the wayside. However, Strachan believes there will be few development casualties and that the pipeline will be lengthened rather than its contents siphoned off and quietly disposed of. By this analysis, planned retail space will become a reality – it’s just that things will take longer than originally intended.

Savills director Nick Symons says that economic woes will have an effect on new developments and leasing patterns, but that these effects will not be nearly as drastic as many imagine. “The credit crunch has not necessarily made any difference to the sort of lease structures that we’ve been seeing in the past year to 18 months,” he says.

Symons adds that within shopping centres the established practice is for retailers to take a 10-year lease, and that, in some instances, deals that include five-year breaks or short-term five-year leases are being struck. That said, five-year leases are far from common according to Symons and, in some cases, they are agreed with retail franchisees where operators may only have a licence to operate for a period of that length.

He is also bullish when forecasting pre-let patterns. Citing Westfield’s White City scheme in London and Land Securities’ St David’s 2 development in Cardiff, he says: “These schemes will have ambitions [to be pre-let] north of 80 per cent.” And when it comes to signing on the dotted line, it is not the rent that is proving problematic for retailers, according to Symons. “I think that rents are affordable,” he says. “The biggest issue for retailers at the moment is the capital expenditure prior to opening.”

And this, he explains, is where landlords are helping out more than may have been the case in the recent past. “Different retailers are looking for different things,” says Symons. “Some want extended rent-free periods [when they join a scheme], while others may be looking for help on the fit-out of a store.” He warns, however, that “some of them [retailers], frankly, are just trying it on and they get short shrift”.

Talk to the big landlords and it becomes apparent that this latter attitude is likely to prevail when it comes to the biggest schemes. Lend Lease development director Peter Allwood says: “ We had a get-together with some retailers recently and the typical reaction was that things are not nearly as bad as the media has been making them out to be. We’re continuing with business as usual. In all our assets, trading is holding up well.” This probably means that retailers seeking lower rents or improved terms are unlikely to find them in premium schemes such as Touchwood or Bluewater.

The story is similar at Westfield. Its director of corporate affairs Simon Holberton says: “We are very pleased by the solid take-up of property at our west London development. When people are looking for a national flagship, now they are looking at the West End and west London [Westfield London’s White City]. We are virtually 100 per cent let. Obviously, we are not blind to what we read in the newspapers, but things seem good for us.”

For whatever reason, retailers are reluctant to discuss the terms they are negotiating for new tenancies, presumably in order to steal a march on the competition. But one managing director of a fashion retailer that operates several chains in the UK says there has been no noticeable drop-off in the rents being demanded by landlords across the country.

So does this all add up to new schemes bursting out of the pipeline brimful of tenants? “It is absolutely the exception for schemes to open fully let,” says Strachan. “Life isn’t like that. You shouldn’t think it unusual for a centre to open with a few voids. Even Westfield Derby didn’t open fully let.” Once again, some reading between the lines is called for.

The CBRE report strikes a relatively low-key note, which can be reconciled with the comments of landlords, developers and, to an extent, retailers. We are heading into a period when a stampede to sign a unit is becoming a fond memory, but equally the better schemes are unlikely to welcome their first customers with significant numbers of voids. If there are questions, they are going to be asked of secondary schemes – the evidence suggests they are not likely to prosper whatever anyone might do.