Retail parks innovate as DIY stores slow expansion

The UK bulky-goods sector has not been in the best of health for several years. Many of the largest park landlords have steadily been getting out of the market, concentrating instead on retail parks with open A1 consent – a generally more prosperous part of the out-of-town market and one which, crucially, is not reliant on the fortunes of relatively few retailers.

But opting out of bulky goods – particularly the struggling DIY stores – and making a decent return has become increasingly difficult as the trend towards freezing rents in rent reviews, led by DIY market leader B&Q, threatens to write millions off the capital value of individual units.

B&Q began the trend late last year when the group successfully negotiated to freeze rents at two of its largest stores, in Kidderminster and Ipswich, after arguing there was no demand for large units in the out-of-town bulky goods retail market. And the retailer is close to completing what it calls a right-sizing programme through which it has offloaded well over 1 million sq ft (92,900 sq m) of space and saved more than£11 million in rent in the past year.

The right-sizing programme follows a rapid expansion by B&Q several years ago, which it put sharply into reverse last year when it decided to reduce its opening programme from 18 to 12 stores. Instead of large 100,000 sq ft (9,290 sq m) or more warehouses, the retailer decided to focus on its mini-warehouse format of about 54,000 sq ft (5,015 sq m) – roughly half the size of its former requirement.

The news does not get any better. The retailer said in July that sales were under pressure because the rain had deterred shoppers and dampened demand for traditionally strong summer sellers such as outdoor and garden products. Like-for-like sales were down 2.3 per cent in the 10 weeks to July 14. While B&Q is relying on softer furniture ranges to revive its fortunes, the problems of the DIY sector are inevitably having an effect.

“Our void rate is 4 per cent, but if you look at what is actually available for deals, that is down at 2 per cent, which tells me that there is still robust demand from retailers,” says John Bradbury, chief executive of landlord The Junction. “We have been fortunate because none of our five B&Q Warehouses has down-sized but, similarly, we have not had to consider splitting units up. I still believe there will be rental growth next year, albeit not at the same pace as on the open A1 parks.”

B&Q is not alone. Rival chain Homebase has also suffered, reporting that sales of seasonal items dropped by a fifth as the poor summer weather took its toll on customer demand. Like-for-like sales at Homebase, which is owned by Home Retail Group, saw an 8 per cent fall in the 13 weeks to September 1.

Meanwhile, Focus is evaluating its plan to close up to 50 of its worst-performing stores. Former Wickes director Bill Grimsey is the retailer’s new chief executive after the troubled DIY chain was bought by US private equity firm Cerberus fo r£1 and retail restructuring specialist Hilco is reviewing underperforming stores.

But will there be takers for the vacated space? According to research from Savills and Trevor Wood Associates, not one retailer launched a search for a unit of more than 80,000 sq ft (7,430 sq m) last year.

The majority of retailers acquiring space wanted units of less than 12,000 sq ft (1,115 sq m).

Savills head of commercial research Mat Oakley says: “While we are seeing many retailers leaving the high street in favour of retail parks where rents are more competitive, we are also witnessing large-space occupiers at retail parks changing priorities in a bid to control rent bills. Many retailers are continuing to relocate, close down marginal stores and downsize large stores.”

He adds: “In fact, 70 per cent of the current demand at retail parks is for units of less than 12,000 sq ft, which has resulted in landlords finding it harder to let larger stores.”

Age of consent
Grant Imlah, of property consultant and chartered surveyor Wilkinson Williams says: “Consent is one of the big themes of the moment. There are a bunch of furniture and homeware retailers looking for space around the bigger cities but the consent has to be there. The good news for the market is that Next, Marks & Spencer, Bhs At Home and TK Maxx are all new entrants and will be taking space typically about 10,000 sq ft with an 8,000 sq ft mezzanine, right up to 25,000 sq ft in the case of Bhs At Home. Asda and Tesco also have some big schemes in the pipeline.”

DTZ head of retail warehousing Marcus Wood also believes that the present issues in the market have conspired to make units look better value for investors, many of whom are now sitting on assets with questionable futures. “There were warning signs about rents, which had really maxed out and rental growth was clearly unsustainable,” he reflects. “Despite that, yields continued to compress, even at the back end of 2005, while we had historic interest rate lows. Some investors turned a professional blind eye to the truth about the rental market.”

For Wood, the priority for asset holders is to be much more proactive about how they maximise value and he remains optimistic, despite the gloomy market prognosis. “For those holding assets, showing static capital growth or slight yield decompression, I would do whatever I could to increase the development’s value and squeeze as much income out of the space as possible,” he says. “You need to intensify assets and decide what, over the next five years, will attract the maximum spending power to a park. But that doesn’t mean dumping a food and beverage offer in front of retailers, it means integrating these offers within the environment.”

The bulky-goods retailers have had to act too. B&Q has sub-let some space within its larger units, while landlords are also addressing some of their larger, unwanted units, sub-dividing them into the shapes and sizes desired by retailers at present.

“If you have an old park that looks old then there is no easy way out of that,” says Savills associate director Dominic Rodbourne.

“Breaking up a bulky-goods unit in to, say, two smaller units is certainly a good way forward, providing the depth-to-width ratios permit and that you do not end up with two rifle ranges. In truth, there is not an influx of new retailers at the moment and those that are looking for space are getting more and more sophisticated about the way they work their space and the sales densities, so the trend for smaller stores is continuing. So, in those cases, I think mixed-use is the obvious way forward.”

That trend is also evident at the fashion schemes, which have generally prospered, where niche players such as Body Shop and Specsavers are being accommodated in units as small as 2,000 sq ft to 3,000 sq ft (185 sq m to 280 sq m).

“In terms of rental growth, the landlords will not see an immediate benefit but doing those deals increases the diversity on the park,” argues Rodbourne. “As far as the parks are concerned, by widening the offer it prevents customers from shopping elsewhere.”

And Grant believes that for landlords the need for constant reinvention is now a prerequisite. “Compared with two to four years ago, the backdrop is now all about mezzanines and planning,” he says. “This is the reality and from a landlord perspective these are the issues that they must address.”