Retail property companies are dumping assets as they seek to reduce their exposure to the sector, and councils are stepping in to buy them and taking on the risk and cost of developing them.
Declining footfall and a slew of company voluntary arrangements have been taking their toll on the owners of shopping centres and retail parks. Hammerson and Intu are among those disposing of certain retail sites, in an attempt to downsize their portfolios and reduce their debt. This has prompted a growing trend of local authorities buying up these sites to drive forward their regeneration.
Proponents argue that this allows councils to generate additional revenue and better serve their communities. Nevertheless, concerns have been raised about the level of council borrowing required to buy shopping centres and retail parks. In October, the Treasury increased the interest rate at which local authorities can borrow money for investment to its highest level in four years, which some viewed as a clampdown.
Councils potentially have the ability to offer retailers better terms than a private landlord and they can consider the all-round revenue of the town
Managing director of a lifestyle chain
Many councils finance the acquisition of shopping centres and retail parks by borrowing from the government’s Public Works Loan Board (PWLB), which provides long-term repayable finance to local authorities at low interest rates – typically paid back over 40 to 50 years.
The Fixing Our “Broken” Town Centres report, published by commercial real estate consultancy Lambert Smith Hampton and retail property trade body Revo in September, shows local authority investment in shopping centres is expected to reach £1bn by the end of 2020. Councils accounted for 16.7% of all spending on shopping centres in 2018, the report shows. Most recently, Hammerson sold St Oswalds Retail Park to Gloucester Council for £54m in November.
Mark Williams, director at retail asset manager Rivington Hark, who headed a government-backed distressed retail property taskforce between 2012 and 2015, says: “Local authorities buying assets in their own town centres makes absolute sense. They are trying to rejuvenate failing towns, and by doing it they’re looking at assets on a long-term basis.
“The payback for councils is not just in rents. By regenerating the centres, they can reduce burdens on NHS services as more people are working; increase business rates; and raise the general well-being of the town. There’s a lot of social good that can be monetised by a council, which the private sector cannot do as they only get money from rents and yields.”
Landlords like Intu, British Land and Hammerson are struggling, and traditional investors are moving out
Steve Norris, Lambert Smith Hampton
Last month Blackpool Council bought the 400,000 sq ft Houndshill Shopping Centre for £46.7m from BCC Eiffel and its backers, Waypoint and New Frontier, which had paid £105m for it in 2015. The centre has more than 60 shops, including a Debenhams.
In a statement the council said: “This acquisition will deliver a significant financial return to the council but, more importantly, it will allow us to invest in a shopping centre that is fundamentally important to Blackpool’s future.
“Moving the centre into council ownership will provide significant benefits to our town and our residents. At the same time, we have the potential to unlock up to £50m of investment in the town through the Future High Streets and Towns Funds, which will undoubtedly give further momentum to the regeneration of the town centre.”
Last year, Bolton Council spent £14.8m on Crompton Place shopping centre as part of a wider £1.5bn town regeneration plan. The centre forms one of five “intervention areas” the council identified in the town, and will be redeveloped in partnership with the private sector.
In March it announced a tie-up with Beijing Construction Engineering Group International for a £250m redevelopment programme, including the shopping centre.
Williams says: “In Bolton they are demolishing an old shopping centre, shrinking the retail component, and adding in leisure and housing. The existing building is a major blight on the town centre – it was badly designed in the 1960s and they are doing what should’ve happened many years ago.”
Steve Norris, national head of planning, development and regeneration at Lambert Smith Hampton, explains that councils often have no choice but to step in when private investors exit the retail market: “Town centres are being challenged left, right and centre – the business rates and costs of a physical retailer are higher than trading out of centre.
“Landlords like Intu, British Land and Hammerson are struggling, and traditional investors are moving out. The bigger town centres such as Birmingham, Manchester and Bristol are well placed to withstand the challenges as they have the critical mass, but it is the smaller-to-medium-sized centres that will struggle.
“Towns such as Nuneaton or Rugby have two or three shopping centres and the market can now only support one or two. We are 20%-30% overshopped. The councils’ strategy is to consolidate and make a stronger, smaller core [of retail] fill the space with more residential and have more people living near the high street itself – a captive audience who spend their money in the locality.”
However, some people have questioned the risks attached to heavy council borrowing. Many councils finance the acquisition of shopping centres and retail parks by borrowing from the government’s Public Works Loan Board (PWLB), which provides long-term repayable finance to local authorities at low interest rates – typically paid back over 40 to 50 years.
One retail landlord says: “When I hear stories of local councils buying shopping centres, I think that’s a recipe for disaster.
“I can envisage a situation where, when rents become unsustainable, we will have councils going bust because of the debt they’re laden with in buying them. Consider the repercussions in our industry of having empty shopping centres owned by councils not able to service those loans.”
But others believe the advantages outweigh the risks.
The managing director of one lifestyle chain tells Drapers: “I am not a huge fan of government getting involved [in retail property], but we are in strange times and they have this fund available at extremely low interest rates.
“They potentially have the ability to offer retailers better terms than a private landlord and they can consider the all-round revenue of the town by incentivising retailers. The danger is that they [councils] are not very good at looking after retail assets. But landlords are walking away.”
In October, the Treasury raised the interest rate on the PWLB from 1.8% to 2.8% for new loans, which many believed was designed to discourage speculative borrowing. It explained that “some local authorities have substantially increased their use of the PWLB in recent months, as the cost of borrowing has fallen to record lows”. The Treasury was restricted from further comment because of purdah.
Councils are duty bound to follow what is known as the “prudential code” for borrowing, compiled by the Chartered Institute of Public Finance and Accountancy (CIPFA). Don Peebles, head of policy and technical at CIPFA, said councils should “ensure they do not take on an inappropriate amount of risk when exercising their investment powers”.
Swansea Council started work last week on the £1bn Swansea Central scheme, which will include a 3,500-seat arena built above a multistorey car park alongside a hotel, shops, new bridge and housing. The scheme is being funded by the council, the Welsh government and the UK government.
Cabinet member for regeneration, Robert Francis-Davies, says: “When it comes to borrowing, I don’t think there is a risk. If you have competence in your city and equity in your city, you’ll make sure it works. It’s so easy in times of austerity to neglect things that are important such as town centres and placemaking, but making a destination strong and a place people want to enjoy is important.”
As well as investing wisely, property sources stress that local authorities must bring in experts to manage retail sites properly.
Shopping centre owner NewRiver launched a third-party asset management service in 2018 to capitalise on the growing trend of retail real estate acquisitions by local authorities and specialist real estate developers.
NewRiver CEO Allan Lockhart tells Drapers: “Local authorities have the ability to provide capital. We strongly believe town centres are assets of community value – strategically they are important for their communities. Councils have a vested interest that they are managed properly. A combination of public-private partnership is the way forward – it effects a positive change.”
The Drapers Verdict
Against a backdrop of tough trading conditions, sluggish footfall and a crisis in bricks-and-mortar retail, property companies are backing away from shopping centres and retail parks – and councils could provide the answer. The mutual benefits are clear: by regenerating their local retail sites, local authorities can inject new life into their communities, while retailers should see footfall improve.
Concerns about the risk of heightened local authority borrowing seem to be outweighed by the opportunities for retail regeneration. However, proper management of these assets is key. If councils do not have the expertise to run successful shopping centres and retail parks, strategic partnerships with the private sector are a must.