By Nick Hilton, Partner for Retail and Leisure at Workman
UK shopping centers have always been an attractive asset class, and investment activity has been on the rise as investors have capitalized on the mispricing-related opportunities presented by lower price-per-square-foot capital value compared to other verticals.
Retail still offers solid, diversified income streams where occupational demand exists, beyond traditional retail, particularly in the F&B, leisure, and community-oriented activities. For new investors, optionality is a major draw, especially in locations with strong economic activity, where value can be created through redevelopment.
Indeed, a significant portion of shopping center and leisure deals in recent years have had change of use in mind, prompted by the demise of anchor tenants that formerly set the tone for a scheme’s vitality.
The Heart of Investor Strategy
As investors explore the potential for redevelopment and repositioning, creating thriving communities, towns, and cities will be at the heart of their strategies, through the introduction of homes, leisure, workspace, and medical use. Plans for Manchester’s Great Northern will add high-quality office and residential space to its vibrant community of occupiers through a detailed redevelopment program.
Before long-term business plans can be drawn up, new investors must first grapple with the reality and constraints of existing spaces and tenants, as well as the heavy operational demands associated with managing large-scale shopping and leisure destinations. Those are some of the most labor-intensive assets to manage, requiring a level of boots-on-the-ground relationship management incomparable to any other real estate vertical.
Compared to smaller, community retail schemes, larger retail assets can carry significant operational liabilities for investors, as well as employing large operational and management teams. For example, Glasgow’s flagship Silverburn Shopping Centre has an on-site management and operations team of 12 individuals, as well as more than 80 associated contractors.
Aside from the structure and performance of onsite teams, new owners will also need to pay close attention to branding and marketing to position assets within their varied stakeholder and community bases – particularly when considering longer-term redevelopment options.
At Touchwood in Solihull, delivering joint marketing programs in close partnership with key stakeholders within the local authority, independent businesses, and the Solihull Business Improvement District is central to the scheme’s success. Destination marketing, which promotes the holistic, collective experience of the area, is a key local investment that supports relationship-building across the community.
Thorough due diligence in the acquisition process is crucial in order to fully understand operational challenges investors new to the sector may face. Investors, and often their funders and backers too, are now applying a higher level of scrutiny in the selection of strategic partners to help navigate layers of the operational challenge.
The Challenges Are More Intense Than Ever Before
As a result, property managers experienced in complex schemes are very much in demand; investors can draw on the wealth of institutional knowledge and solid relationships on the ground that keep operations running smoothly, while converting opportunities to reduce the sizeable operational cost burdens.
The challenge of getting everything right – and quickly – has never been more intense, with a 12-18-month rollercoaster expected, as consumer confidence dips in the face of a potential recession, and stationary retail continues to compete with online shopping for every pound.
While the heat of the past few months is starting to cool in terms of UK shopping center investment levels, pressure is on for investors to work those investments from the ground up, capturing value and securing returns. For new investors in this asset class – which accounts for a significant portion of recent shopping center transactions – the acquisition of a large-scale or regional retail scheme will need strong partners on the ground to navigate this challenging time for retail.