Retail parks have evolved in a way that few could have envisaged five years ago. But is the rise of powerful fashion offers and comfortable coffee houses enough to gloss over deeper issues for some schemes? Mark Faithfull reports

The retail park market has been on a roller-coaster ride for the past three years. A property class that valiantly managed to stay aloof from the travails of the high street was rocked when some of the traditional bulky goods operators began to rationalise their portfolios or “right-size” units. Those most notably affected were DIY chain B&Q and the feisty consumer electricals group DSGi. Add to that a number of high-profile business failures, which wiped out big-name retail players overnight, particularly in the furniture sector, and it becomes clear that retail parks have witnessed an accelerated polarisation between the fortunes of Open A1 fashion parks and traditional bulky-goods sites.

Despite more flexible approaches by landlords and a plethora of initiatives, ranging from sub-dividing larger units and the addition of mezzanine levels through to the advent of wider food and beverage offers, retail parks continue to achieve mixed growth.

Unattractive yields and better returns from other property types such as offices has meant that parks, like the rest of the industry, have suffered from falling popularity among investors.

The ramifications of that are evident in recent results. Shopping centre and retail park fund manager Capital & Regional (C&R) announced a dramatic
fall in pre-tax profits in the six months to June 30. C&R, which manages the Mall, Junction and X-Leisure funds, recorded pre-tax profits of£53.5 million, down 36 per cent from£146.3 million in 2006. Turnover fell 15 per cent from£57.4 million to£49.8 million.

C&R says the underperformance arose principally from the fund’s exposure to larger DIY units, where earning potential has been reassessed following two third-party rent-review appeals that were decided against other owners.

Real estate company Hammerson has warned that the recent market turmoil could hit retail rents. Chief executive John Richards says that retailers are now demanding more incentives to rent space in new developments. “Rent-free periods that we are being forced to give away have gone up from between nine and 12 months to nearer 18 months,” he says. “Retailers have had a tough time. They are under margin pressure. One of the responses to tighter credit will be that some of the spec developments don’t get built. Therefore, there will be less supply and less depressing of rents.”

However, in such a volatile climate, landlords are responding and the prognosis is far from bleak. Many agents and advisers believe that flexible landlords and new retail players will help maintain and expand the market, with furniture and homeware retailers in particular on the space-acquisition trail.

Homeware improvement

Asda is planning to increase its seven Living stores to 21 by the end of next year. Chief executive Andy Bond speculates that the format could eventually be rolled out to as many as 200 or 300 locations. And Next, which has furniture-only stores at Braehead and Thurrock, TK Maxx, which is understood to be looking at half a dozen locations for furniture-only stores, Marks & Spencer and Bhs at Home are all scouting for new locations for their furniture/homeware offers.

“From the point of view of retail parks, these are new entrants,” says Grant Imlah of agent Wilkinson Williams. “They bring strong covenants and strong brand names with them and the advantage is that, while these formats may be new, the retailers have tested the offer already as part of their traditional stores. For example, the upstairs area of most TK Maxx stores are already dedicated to furniture and homewares, so the retailer knows that the offer works.”

All the retailers are looking for substantial floor space, too, which is something of a rarity in a market where small is becoming beautiful. Bhs at Home typically trades off 25,000 sq ft (2,325 sq m) and may do without a mezzanine. Marks & Spencer is looking for units of about 15,000 sq ft (1,395 sq m), while Next and TK Maxx typically chase 10,000 sq ft (930 sq m) stores with an 8,000 sq ft (745 sq m) mezzanine.

Activity in this sector represents the first glimmer of light in a market where established retailers are leaving, rather than new ones arriving. Consequently, landlords have been looking at significantly different ways of realigning their parks. Marcus Wood, head of retail warehousing at real estate adviser DTZ, believes that the evolution of parks will be as much dictated
by geography as by anything else. “I think we are going to see a real split between what landlords do in London and the Southeast and what they do elsewhere. What we are seeing in the Southeast is park use being spilt up to include a food and beverage offer and residential above,” he reflects.

“The Tandem Centre in Colliers Wood, south London is a perfect example. Phase two of the park includes 20,000 sq ft of food and beverage operators such as Starbucks and Nando’s, plus a Jessops, with three floors of residential above. What you get is not only offers that will increase dwell time to the park, but also residential – typically in safe, well-located positions with off-street parking. It gives people what they want and I believe we will see a lot more developments of this scale in this part of the country.”

So, are we seeing an upturn in the retail park market? Dominic Rodbourne, associate director of Savills, believes that, over the past 12 months, the market has become healthier again. He adds that the situation is “more fluid” and, echoing Richards’ sentiments, says that landlords have needed to be far more flexible in order to fill vacant sites.

“Many retailers will only go in on deals now – and those deals have got tougher,” he says. “Take a
retailer like Dunelm Mill. It is keen to continue expanding, but it will only go where the deal is right. It is not interested in taking a site if the rent is above what it is comfortable paying.”

However, Rodbourne does believe that retailers are more confident about locating an out-of-town and a high street store close together, after initial concerns that they would cannibalise sales. “Certainly, many retailers now feel that this will not be the case, so that is encouraging activity. Similarly, landlords are much more prepared to put smaller units in to optimise the mix at a park. They are doing those deals because they can see that enabling those specialist retailers to trade from their parks improves the overall package and increases the diversity of what is on offer.”

Imlah adds that many retailers are not only insisting on mezzanines and longer incentive periods, but also ensuring that reviews are fixed with perhaps a maximum 3 per cent uplift for the first, second and even third review point.

Such flexibility is particularly pertinent in the fashion malls, which have enjoyed far better health than the traditional bulky goods parks in the past two or three years. “Fashion parks have been very good at expanding their offers so that fashion now includes sectors such as footwear and accessories,” says Wilkinson Williams director Robert Williams. “However, the bulky goods sector has shown growth levels up to 2.5 per cent, so it’s slow growth, but perhaps not quite as bleak as is made out,” he says.

“What is certainly true is that landlords now have to consider their catering offer and how to maintain occupier demand. A good landlord will actively manage the park and that means going out to secure good retailers. If the natural equilibrium of a park is£30 per sq ft, the better landlords are seeking out the sorts of retailers that bring a new dynamic, increase footfall and improve the park. That way, at review, you are looking at a natural equilibrium that is more like£34 per sq ft – but everyone is happy because the performance has improved – it’s a virtuous circle.”

Despite the doom and gloom that has accompanied much of the market – and aside from the high-profile, premium parks that have generally prospered unfettered – Wood believes that stay-away investors may be drawn back after a period in which inward investment has been promoted by yield compression, but which ignored “unsustainable rental growth”.

He explains that, at first, the debt-driven investors withdrew from the sector; then the institutional investors slowed their interest. Consequently, he believes that most of the inevitable price readjustment has occurred, but investors are still cautiously watching from the sides, waiting to see exactly when the market bottoms out.

“I think it is an excellent time to be investing. There are plenty of buying opportunities and the assets are unlikely to get any worse,” he opines. “Also, whereas a year ago, investors might have faced competition from five to even 15 bidders, now, bids are often going unopposed. Between now and Christmas or early next year looks like a very good time to buy.”