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Dec 2018 News

Is adaptation the key to the prosperity of the retail sector?

13 Dec 2018

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Will Mitchell, Associate at Glenny LLP, reviews the shift in market sentiment for retail property and how governmental intervention could assist.

The Christmas television season begins with the highly anticipated adverts of high street retailers.  In a time of changing sentiment to the retail market and the added uncertainty of Brexit negotiations, the quality of advertising is more important than ever.  Should retailers use product placement to enhance our awareness of their Christmas offerings, or should they provide us with a sentimental story that only a hot mug of Glühwein on a cold winter’s evening can replicate?  Regardless of John Lewis’s piano sales or whether Iceland’s Rang-Tan should be on our screens, projections that the high street encountered a tough Christmas sales period are being voiced by several national retailers. So, what does the future of the high street hold in 2019?

We have all read plenty surrounding the changing retail market, but the reality is that ownership of retail property has seldom been more diverse.  The traditional polarization of yields between primary and secondary retail investments has dissipated over the course of the last few years in many suburbs in Greater London and the Provinces.  This is due, in no small part, to the heightened barriers to entry for residential landlords with the introduction of 3% surcharge to SDLT in April 2016 for non-primary home ownership and more onerous obligations with rent deposits and EPCs.  The result has seen a migration of residential landlords to commercial investments.  Typically, these are smaller lot sizes and will still include some residential component, as it is generally perceived as the more secure income source.  Enter the humble shop with residential upper parts.  As experience and expertise have improved, the once residential buy-to-let specialist can now effectively asset manage commercial investments.

Occupational requirements of national, high street retailers have been the principal focus of the property press with a shift in consumer spending and increased rates being some of the main protagonists. There are obviously instances where the capital expenditure required for retailers to maintain market share on a high street or in a city centre is not forthcoming, but has Phillip Hammond put the wheels in motional to alleviate this shortfall in his latest budget speech?

We are yet to understand the fine print, but three key proposals emerged that could continue to shape our high street. Firstly, those retailers whose rating assessments are below £51,000 will have their rates reduced by a third which we are told is an annual saving of £8,000 for up to 90% of retailers and pubs and is welcome news for our local butchers, hair salons and florists. Secondly, the Future High Street Fund of £675m has been created for local authorities to draw up formal plans to rejuvenate their town and city centres.  So often local authorities do not have the support to spend this money effectively and so further guidance will be needed for this to be successful.  Phillip Hammond talked of the need to adapt the high street, which brings us to his third key point to relax planning laws of underutilised retail properties to residential uses.

The initial response was “that will never work” or “that will just kill the high street”.  We may find that property owners are loath to convert their retail premises to residential accommodation for the reasons stated above. Having inspected a number of basic retail conversions that have been made into flats under permitted development (without the need for formal planning), this initiative could disrupt the urban planning of high streets.  Typically, the quality of conversion is poor, and it attracts the very few remaining Rackman style landlords now that Houses in Multiple Occupation are regulated much better (beware the new licensing that came into effect in October 2018!).

We can safely hypothesise that few people in suburban locations will let or purchase a retail conversion that adjoin other retail premises on a busy high street or with a plate glass frontage.  This relaxation could be effective for the conversion of isolated retail units such as local convenience stores, but these retailers are typically quite resilient as they sell inelastic products.

The availability of freehold industrial and office premises is very restricted with new sales frequently achieving record values. Outside large town and city centres, we have seen office occupiers taking poor quality industrial units and converting these into offices, a trend that Tesco started many years ago in Hertfordshire. Perhaps the relaxation of planning to office uses could assist?  For business owners who suffer no loss of goodwill by relocating to high street areas, underutilised retail premises could create front of house office space.

We often forget to address these issues at street level before appealing to higher powers. Retailers need to burden the responsibility to an extent.  Change, sound marketing, and product or service diversification are essential to maintaining competitive advantage and market share. Non-traditional television advertisers such as Visa and AmEx identified this at a local level with their Christmas television adverts, which created a sense of nostalgia with local retailers singing along to Mariah Carey or offering cashback for purchasing from retailers branded as a small business.  However, it would be naïve not to mention that no matter how much money is given to some retailers, they will not be able to compete with the pricing and supply chains of larger, logistics-led retailers including the potential mammoth of Sainsburys/Asda.

The retail market is still flourishing, and the alignment of real estate requirements will continue to create a retail revolution. Could we see a more logistics-led approach with clothing retailers? Will the influence of potential trade barriers while Brexit negotiations are ongoing create a prolonged wait and see approach?

The retail market through 2019 will be an interesting place and, depending upon the fine print, the adaptation to our high streets could be stimulated by the latest Budget speech.  It is paramount that the number of shops that can be converted is limited and is sympathetic to each location, otherwise we may find that our future Christmas adverts are no longer set in town centres and, let’s be honest, we all love seeing the Christmas Coca Cola lorry arriving in the town square!

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