The debate around the future of retail has been raging for some time, but the fire has been stoked further by the covid-19 enforced shutdown.
Consensus has always been that there is too much retail property in the UK, mainly in high streets and shopping centres.
NewRiver REIT this week gave some indication to the road ahead for retail landlords in full year results, in which NAV fell 23% and valuations dropped 12.3%.
While its retail valuations are under significant pressure, NewRiver is looking to the assets’ alternative use potential as an opportunity.
It has a development pipeline of 2.5m sq ft on its retail assets, 90% of which is focused on alternative uses – mainly residential. It said it would develop some of this itself, but the majority would be sold off with planning in place for an alternative use.
At its shopping centre in Grays, Essex, the group has submitted a planning application that will significantly reduce the retail footprint by introducing 800 residential units.
“We take the alternative use potential very seriously as an opportunity for us to add value as a business,” chief executive Allan Lockhart said in an analyst call. “Many of our shopping centres are located in the heart of town centres in local communities, clearly there is a great opportunity there to deliver much needed residential.”
The housing shortage in the UK has been well-publicised and this has coincided with the oversupply of space in the retail market. Over the last few years online retail sales have increased from around 6% to around 20%, but that has not created extra spending demand but just diverted from physical retail to online.
However, there has been no adjustment of retail floorspace.
Residential is the obvious alternative use, but other asset classes are just as viable in some schemes. At NewRiver’s Sprucefield Retail Park asset in Northern Ireland, it said it had received strong interest from logistics operators for the development land there.
Retail parks are natural locations for logistics operators due to their locations in central urban locations and we expect to see logistics investors buying retail park sites to become more widespread very soon as retail valuations continue to fall.
Another alternative use for retail in shopping centres is offices. Unibail-Rodamco-Westfield this week outlined plans to transform the huge former House of Fraser department store in its west London mall into offices.
It is clear that there is a significant amount of surplus retail space in the UK and this seems only likely to grow. However, retail landlords, such as NewRiver, that are on the front foot and are positive to the opportunities, can still prosper in the new retail world.