Retail’s future will be anchored by social value

In the weeks ahead, as workers and shoppers continue to return in larger numbers to places of work, high streets and shopping centres, the eagle-eyed will start to detect an accelerated change in the traditional retail landscape. With the disappearance of once omnipresent retail fixtures, such as Debenhams and John Lewis, sites that once housed bricks-and-mortar retailers for decades are becoming interconnected hybrid spaces filled by homes, co-working, pop-up retail, leisure and experiences, wellness clinics, urban fulfilment hubs, maker spaces and life sciences operators keen to bring laboratories to the dynamism of urban spaces. The next phase of retail’s evolution will be shaped by the big structural trends: public health and safety, demographics, climate change and technology.

For some retailers, change has been forced upon them, such as Asos’s purchase of Sir Philip Green’s popular high street brands, including Topshop, Topman and Miss Selfridge, and Debenhams’ sale to fashion retailer Boohoo. In both cases, brands, websites and stock, but not the stores. But other retailers have stewarded their fate, some diversifying business model. John Lewis has entered the build-to-rent (BTR) and office sectors and intends to pivot to a 60-70% online retailer by 2025. The John Lewis homes will be furnished by its home products range and serviced by its Waitrose food stores. For some brands, the pandemic has been an eye-opener, which will prompt a rethink of real estate footprint assumptions. Inditex, which owns Zara, registered 77% growth in online sales during 2020. Adidas reported triple-digit global e-commerce sales growth during several months in 2020, levelling out at 53% for the full year. The message is evident on all sides. Shaftesbury, the super-prime West End landlord, says it is “reconfiguring buildings” by downsizing retail space and introducing alternative uses.

In more challenging regional retail locations, repurposing shopping centres is a more significant challenge requiring little technological help.  Capital & Regional’s strategy shows promise. The shopping centre REIT has teamed up with REEF Technology, whose investors include the SoftBank Vision Fund, to transform its underutilised shopping centres and car parks into mixed-use neighbourhood hubs. The emphasis is on community-focused centres with locally-curated goods, services and experiences that create local employment opportunities and satisfy expectations in the on-demand economy. Tech-enabled innovations range from delivery-only neighbourhood kitchens (supporting local businesses), urban farms (with food locally grown, environmentally friendly and free of extended supply chains), last-mile logistics, storage, fulfilment and digital lockers (supported by e-scooter cargo fleet), and smart transit and eco-friendly commuting services (e.g., e-bikes, e-scooter rental stations, electric vehicle charging).

The lesson from Capital & Regional’s vision is that retail as just retail is over. But retail as the epicentre for the community can revive and help digitalise towns and cities across the UK. Central to this technology-inspired vision is finding new sustainable income sources separate from the retail units’ income. The physical retailers operating there will often be second-order to the social purpose of the space. But to support this transformation, locations that have legacy traditional retailer income, even short-term, can provide much-needed financing while owners secure any required change of use planning approval. In some cases, public-private partnerships may also facilitate regeneration, aligned to local government and corporate environmental, social and corporate governance (ESG) objectives.

In city centre locations, obsolete retail space can also be unlocked for growth sectors, such as the life sciences industry, underpinned by demographics, public health and technology. These structural tailwinds have supported significant venture capital investment, a predictor of future real estate demand. In 2020, £2.4 billion of life science-related capital raised by London-based life science companies, according to Savills. Innovation hubs benefit from a ‘triple helix’ of government, university and industry collaboration to pursue new medical breakthroughs to prevent and cure diseases and viruses.  In London, hubs are emerging around King’s Cross and Euston, White City, and developments in London Bridge and Waterloo.

Covid-19 has accelerated the ‘right-sizing’ of retail for the on-demand economy. As the UK reopens and the government’s loan schemes and insolvency protections are unwound, some further shakeout of weak retailers is inevitable. There are as much as 40,000 vacant retail units across the UK, a number expected to double by 2026, according to JLL, as brands shrink their footprint and a wave of CVAs and tenant bankruptcies emerge. Among the suiters will be opportunistic capital.

Opportunistic investors are well-placed to repurpose large stores, attracted by distressed pricing, high yields and the upside potential of converting vacant, or failing, retail into residential, food and pop-up retail-anchored scheme. For high-risk appetite investors, repositioning well-located secondary retail assets offer a compelling return profile. Some of these retail locations will represent a rare opportunity to acquire core and distressed assets for repurposing at a relatively low cost. Investors can expect discounts of up to more than 20%, according to Colliers, with most opportunities emerging in the second half of 2021. Many of these deals will originate via distressed corporate positions and non-performing loans, which will provide investors with the opportunity to scale quickly.

The emergence of new specialist equity and debt funds is indicative of investor expectations.  For example, Maya Capital’s vehicle aims to acquire £250 million of assets as COVID-19 impacts retailers across multiple sectors. The new fund will target retail assets in need of regeneration in the UK. Elsewhere, Rivercrown plans to raise to €500 million for a special situations debt fund to target retail and leisure assets across Europe with an element of “short-term, situational distress”. However, there with investment activity expected to be muted until Q3, synchronised to the successful completion of the UK’s Covid-19 vaccination programme, the market may remain in the price discovery phase for secondary retail for a little while yet.

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