Retailers could gain the upper hand in terms of rent negotiations if developers struggle to fill new shopping centres.
As retailers, landlords and property agents got together at the British Council of Shopping Centres’ annual conference in Liverpool last week, they faced a very different economic climate from last year.
The past year has seen the opening of a huge amount of retail space, including developments in Belfast, High Wycombe, Leicester, Bristol and London’s White City. The schemes all opened mostly fully let, but the reality is that the mood has now changed.
A report by accountancy firm PricewaterhouseCoopers last week predicted that a combination of businesses going bust, slowdown in demand and more online shopping would result in one in five shops on the high street being empty by the end of the economic downturn. These projections may be extreme, but letting agents and landlords will have to work harder to convince retailers that they need to open stores over the next few years.
Ciaran Bird, head of UK retail at letting agent CB Richard Ellis, says: “There are better deals around but you can’t generalise that rents are coming down. Retailers sometimes do not appreciate that landlords are under as much pressure as they are until we do a mock-up of the numbers so they can see that what they want won’t work. However, there are secondary schemes which have been planned on the back of no real advice or demand, and in places like that there will end up being so many vacancies that landlords will have to let the stores at much lower rents.”
Watch this space
Next year, one of the main schemes to open in the UK will be Arc, a 265,000sq ft retail in Bury St Edmunds in Suffolk, which is due to open in the spring.
Graham Chalk, head of project management at developer Centros, says the scheme is 85% let to high street and premium fashion retailers. “There is no getting away from the fact that it’s not an easy market, but this year about eight million sq ft of retail space opened, compared with around two and a half million next year,” he says.
“Bury St Edmunds has a broad demographic so there is demand for a range of retail.”
Schemes which are at a later stage and are due to open this autumn include the St Davids 2 scheme in Cardiff, a joint development between Land Securities and Capital Shopping Centres, which will be anchored by John Lewis. It will add 900,000sq ft of space to the existing St Davids centre, creating a total of 1.4 million sq ft.
According to Marcus Kilby, managing director of Lunson Mitchenall, one of the letting agents for the scheme, about 50% of the development is let or in negotiations. “Every retailer is looking critically at space,” he says. “They want to expand but cautiously and only when it makes sense. They are increasingly driving a hard bargain, but we have a quality product.”
However, he adds that retailers are biding their time. “Retailers have had so much to deal with this year and have said they want to be in the scheme, but they are waiting to deal with it next year to see whether they are going to cut back,” he says.
The third major scheme is real estate company Hammerson’s Union Square shopping complex in Aberdeen. David Atkins, managing director of UK retail at Hammerson, which opened Highcross Leicester and Cabot Circus in Bristol this year, is confident about letting but has revised expectations. “This year, we aimed for 80% to 90% to let on opening. In future we will be looking to see more like 70%. However, because there’s no anchor we can offer more affordable rental deals,” he says.
However, retailers and agents say that a business looking to expand will find more favourable deals, but most are waiting until after Christmas before committing.
One agent, acting on behalf of a young fashion brand, says: “I went to a meeting with a landlord and they asked me what deal I wanted, which I was unprepared for as they normally put a deal on the table, but we don’t want to commit to anything at the moment.”
A business that is on the expansion trail is young fashion retailer Cult Clothing, which plans to open eight stores a year over the next few years. Founder Julian Dunkerton says the downturn has made its plans easier.
“There are shopping centres and high streets that we can get sites in now that would have been a struggle a year ago. Shopping centres have to vie for our business. We won’t do a deal if we think we can get something cheaper elsewhere. Incentives could be cash for fit-outs, turnover rent deals and long rent-free periods. You can count the number of expanding retailers in the UK on a few fingers. The power has shifted from the landlord to the retailer,” he says.
But one retail agent says retailers have to be careful not to shoot themselves in the foot when looking for cheaper leases. “Retailers can’t get growth from expanding like-for-like sales so they need to open stores to boost sales. If a big potential tenant or anchor insists on driving cheaper deals then what could happen is the scheme won’t get built and the retailer suddenly doesn’t have that shop as part of its expansion plans.”
Arc, Bury St Edmunds
Planned opening Spring 2009
Space 265,000sq ft
How much let 85%
Anchored by Debenhams
Other stores Fat Face, Peacocks, River Island
St Davids 2, Cardiff
Planned opening Autumn 2009
Space 967,000sq ft
How much let 47%
Anchored by John Lewis
Other stores Hugo Boss, Kurt Geiger
Union Square, Aberdeen
Planned opening Autumn 2009
Space 525,000sq ft
How much let 32%
Anchored by No anchor
Other stores Next, New Look
22%: Percentage of high street that could be vacant by the end of the economic downturn
1,293: Number of shops jettisoned by restructuring retailers in the first half of 2008
33m sq ft: Amount of retail space in the pipeline as of last autumn