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Retailers to ask: Deal or no deal?

With retail space oversupply a real threat in some UK areas, businesses might never be better placed to negotiate deals.

The great and good of the retail property world flocked to Tyneside last week for the annual conference of the British Council of Shopping Centres.

The venue, at the Sage centre in Gateshead, was a fittingly spectacular setting for the event which, as usual, attracted its fair share of retailers, as well as agents and developers.

The mood was upbeat despite a year of tough trading for retailers, and a diminished appetite for opening new space.

The retail property investment market has slowed dramatically as developers exercise caution over new developments, or even pull planned schemes. However, there is still around 44.5 million sq ft of space planned in the pipeline by 2012, according to research by property firm Colliers CRE.

Next year will see millions of square feet open in White City in west London, Bristol, Liverpool and Belfast alone.

The Colliers’ report, published earlier this month, warned that an oversupply of space could occur in areas where demand for new space has dropped off. It put the blame for this on difficult trading conditions following a series of interest rate rises and a fall in consumer spending.
Colliers CRE head of retail Greg Styles says: “Tough trading conditions have begun to restrict the number of requirements for new retail space and this means there is now an imbalance between supply and demand for floorspace in some locations.

“This is causing developers to exercise caution, and some are choosing to delay scheme openings until more positive market indicators are evident.”

However, several agents and developers at the conference told Drapers that retailers were in a better position than they have been in a long while to achieve favourable deals.

Certainly, the higher profile shopping centres to open this year, such as Princesshay in Exeter in September, and Silverburn in Pollok, near Glasgow, and Westfield Derby in October, have seen a healthy spattering of smaller business sign up to the schemes.

Most developers are now making extra efforts to attract independent retailers and smaller businesses into new developments.

Some indies who have taken space in high-profile malls, such as kidswear chain Bratz in Manchester’s Arndale Centre and the Bullring in Birmingham, have struggled, illustrating the danger of taking on high-profile stores in expensive locations.

However, young fashion indie Ministry, and kidswear business Ekko, have taken advantage of developers looking to attract smaller businesses to their schemes by opening stores at the Westfield Derby mall.

Although most developers say that such businesses are more in demand from shoppers wanting something different from the same high street names, it is also convenient for developers wanting to get occupiers in difficult to let units, or when demand has tailed off.
The north west is considered the region most likely to suffer oversupply. Colliers CRE says the area has the biggest concentration of space in the pipeline.

The report states that given the fact that the north west’s floorspace per head figure already exceeds the UK average, there must be concerns about whether there is sufficient demand from both consumers and prospective occupiers to prevent an over-supply of retail space. It adds that Scotland, Northern Ireland and the south west are also areas of concern for landlords and agents.

Some retailers are still acquisitive. John Lewis is planning a raft of stores over the next five years, while House of Fraser is also on the lookout for space, with chief executive John King one of the highest- profile retail bosses doing the rounds at the BCSC conference.

Also spotted at the event was retail entrepreneur and former Marks & Spencer director Maurice Helfgott, whose retail interests include KookaﬠLong Tall Sally, and Bench and Hooch owner Americana International.

However, one agent admitted the market was weighted in favour of multiples: “It’s worth remembering that big-name retailers are in demand from landlords as anchor tenants to start the ball rolling in terms of letting. As a result, they are often given hefty incentives to join a scheme, while smaller businesses are asked to pay a premium.

“Nevertheless, in a slowing market there is no reason why smaller retailers should not be able to take advantage of the proliferation of space when demand is slowing.”

Colliers’ Styles says that the bigger, anchor retailers are blessed with a wide variety of choice. “They can drive hard bargains because the pool of good anchor stores has dropped in the past few years,” he says. “We don’t have Littlewoods, Bhs isn’t opening stores, and music retailers who were good anchors are not as aggressive as before. They can afford to be choosy.”

Styles adds that deals with smaller retailers are often carried out in the final 18 months or so of letting a scheme and, with all the talk of clone towns, the smaller businesses will add some spice to the developments. “Whether they can get a better deal now is very regionally specific,” he says. “In good schemes, with good anchors, there is still demand from a lot of retailers. Where schemes are struggling viability-wise is where there is already a good offer and demand is slipping.”

Styles explains that landlords can include fitout costs and break clauses, but only if they are sure the business won’t go bust. “Rental growth across the UK this year will be pretty flat in real terms. Retailers are still doing deals – it’s just that there’s more choice about now,” he says.
A typical arrangement that can help a smaller business get a foothold in larger centres requires the developer to assist with storefit costs. In many cases, developers demand high-quality fascias – Westfield’s Derby scheme included expensive double-height glass shop fronts on most stores.

Also, turnover-based rents should be something landlords are more willing to agree to. Here, a proportion of the rent is paid based on the sales the business is generating, so the landlord shares – to an extent – the ups and downs of the trading climate.

Shorter leases with more frequent break clauses mean that retailers do not have to sign up for a long-term commitment to an expensive location.

Although some cynicism remains about the motives of landlords and agents signing up smaller businesses simply as short-term space fillers, landlords insist that they are reacting to consumer demand for more individual retail offers in shopping centres and high streets.

Another retail agent said: “Things are still buoyant but it’s definitely the case that retailers are in a stronger position now. They are better placed to do deals with agents and landlords, which make it a little less scary to open a store.”

Mark Granditer, owner of 21-strong family-run chain Base Menswear, has opened four stores recently in Uxbridge in north London, Luton, the Bullring in Birmingham, and Westfield Derby. The men’s young fashion and boyswear business is also planning more high-profile locations next year.

Granditer says: “Landlords are definitely more amenable to good deals now there’s a lot of new space. We will push for more from deals in the future – not because we’re greedy, but because the market is tougher.

“If landlords want to rent space they have to be more flexible, or retailers will be wary about making long-term commitments in this climate. What’s good today might not be good tomorrow. A capital contribution to shopfit or turnover leases creates a partnership that gives a retailer more comfort.”

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