20,622 UK stores are forecast to close this year. The collapse of intu has
renewed the debate over the future of retail and, for landlords, the future of
the physical space that houses retail tenants.
The prime minister’s ‘build, build, build’ speech, including
what he has dubbed ‘Project Speed’, has promised the most radical planning
reforms since the Second World War and looks set to ease the transformation of
commercial buildings into residential use. But a major hurdle to the repurposing
of UK retail into alternative uses, whether residential or logistics, is debt
providers’ reluctance to take on the risk and support schemes.
Why is this? First and foremost, the entire process is uncertain
and capital-intensive. You need a sponsor that is well-capitalised. Securing
vacant possession of a multi-let shopping centre is very difficult, with the
real risk of the last remaining tenants holding a developer to ransom, while
local authorities are reluctant to use compulsory purchase legislation for
myriad reasons, including the underwriting costs.
Retail repurposing projects are not a natural fit for funders,
as what are effectively ‘pre-development’ loans are further up the risk
spectrum than many banks are comfortable with.
Before you even get to the redevelopment costs, there’s the
initial asset-value erosion and possibility of having a negative net operating
income (NOI) as leases are surrendered and vacant rates and service charge
accounted for. If the site includes existing long-dated income that can be
secured into the new development, this assists significantly with the NOI.
Location is also key. There needs to be inherent value in the
land itself and strong demand for residential at attractive pricing. These
sites are usually in the South East and benefit from excellent transport
connectivity. Where values are especially low, it may be appropriate for local
authorities to purchase sites and engineer some value into them.
Strong track record
A borrower also needs to demonstrate a good relationship with
local stakeholders and a strong track record of working up a planning
application. Generally, planning policy supports the repurposing of a failing
The risk to the developer lies with acceptable massing or height
of a new residential lead scheme, as well as the percentage of affordable
housing and other planning requirements.
Project Speed is a much-needed boost, but the government could
go further by underwriting local authorities compulsory purchase powers that
allow them to buy out tenant leases, waive business rates during
pre-development and encourage tall buildings in the town centre.
Evolving retail space into mixed-use, community-led real estate,
puts consumers at the heart of the developments and delivers space they will
engage with. We were involved in an example of this at Surrey Quays with
development and design group Sellar. We successfully negotiated a surrender and
regrant with Decathlon and obtained planning consent for more than 1,000 new
apartments. Sellar has gone on to successfully build out the first phase,
creating a vibrant centre core to a wider masterplan.
The government’s latest proposals should move things in the
right direction, but more measures are required to make repurposing retail into
residential viable. Other conversions, for example to retail warehousing to
logistics, make more sense; but with a desperate shortage of housing across the
UK, converting retail to residential should be a national priority.
William Scoular is head of private client lending in Investec’s
Structured Property Finance Team