Written By: Joanna Turner
Head of Property Research
Canada Life Asset Management

Joanna Turner from Canada Life Asset Management looks at how The pandemic has accelerated changes in UK shops, creating a 20-40% oversupply of retail space

Taking a lockdown walk down pretty much any UK high street offers a lugubrious vista of retail’s bruised survivors interspersed with shuttered and boarded-up shops. Some declare, perhaps optimistically, that they are closed “until further notice”. Others are just plain closed.

Covid-19 has been devastating for physical retail, but the UK’s mountain of unwanted shop space did not come out of the blue. Lockdowns have greatly accelerated trends that were already present before the pandemic, including the gutting of communities and town centre shopping areas, the growth of remote working and the irresistible rise of e-commerce.

The pandemic has exacerbated an imbalance in retail supply and demand that has been with us for some years. Estimates vary, but a broad consensus view is that the UK now has between 20% and 40% too much retail space.

The size of the problem
Since 2018 around 27 million square feet of retail space has been vacated with, of course, a sharp rise in vacancies during 2020, creating a net loss of over 8,000 trading stores over the past two years. The recent collapse of Debenhams alone has left the UK retail market with a further 12.5 million square feet of vacant space. That’s equivalent to around 160 football pitches.

Commercial property is not an asset class that can turn on a sixpence in response to changes in demand. The current supply of retail space is the result of investment decisions taken years ago, when the retail environment looked very different and online retailing had not been invented.

Vacancies are likely to increase further. Around 65% of retail and food and beverage leases signed since 2015 will expire or be broken by 2025, according to EGI. At the same time rents have declined, falling by over 15% in the past 10 years, and average lease lengths have plunged by 28%. If current trends continue there will be 300 million square feet of excess retail space by 2030.

When the wind blows the grass bends
This is not the first time that the UK’s shops and high streets have faced disruptive change. The growth and decline of suburbs, the move to office-based service industries, the rise and demise of cinemas in the 20th century, the switch from independently-run food shops to supermarkets – all caused obsolete forms of retail to flounder before the sector adapted to a new steady state.

The UK still loves to shop, but it is doing it differently. Successful online retailers such as Boohoo and Asos have had a good pandemic and are snapping up old retail brands such as Topman, Dorothy Perkins and Topshop, but they do not want old retail’s shops. Has physical retail had its day or can it offer something that e-commerce lacks? And if shops are becoming less in demand, what should we do with the UK’s acres of empty retail space?

Blinkered by the present
While we are still in lockdown it is difficult to imagine life returning to normal, and easy to over-estimate the amount of durable change caused by the past year. After lockdown there will be pent-up demand for the experiences that people have missed, including shopping and leisure activities in town and city centres. E-commerce is convenient but for less run-of-the-mill purchases it can lack physical retail’s sense of occasion, customer service and immersion.

We could therefore see more of a recovery in the take-up of retail space than we expect, although not across the board. Larger cities are better placed to absorb the economic impact of the pandemic. For some smaller cities and towns, reviving high streets and town centres is likely to be a long-term project that calls for creative thinking, but it could also represent an opportunity.

What will future retail look like?
Developing new long-term uses for retail spaces that enhance the wider urban environment is more likely to succeed if there is collaboration between customers, local residents, tenants, local authorities and investors. The interests of these parties are not always aligned but faced with common threat they may join forces, and in several examples across the country already have. Competing investors who own properties on the same high street may need to work together to ensure that the area has a profitable future.

There is also a potential tension between the needs of investors, who want to see a return on their investments sooner rather than later, and the need to deliver long-term sustainable solutions. The effects of decisions made now will be with us for years to come; some of today’s biggest urban headaches are rooted in planning decisions from the 1960s and 1970s.

Retail space is already undergoing significant change. Between 2014 and 2020 one in three change of use applications were for redevelopment as food and beverage premises, closely followed by applications to repurpose as housing or hotels. Food and beverage outlets appear to have reached saturation point and were experiencing high failure rates even before the pandemic. However, there is still strong demand for good-quality housing and this can work well if it is well-planned, with collaboration between private developers, investors and local authorities. For many areas the most fruitful route to regeneration and sustainability is likely to involve planned mixed use development, with close attention to deciding what will work best in a specific location to create a sense of purpose and place.

In many locations the keys to success are likely to lie in economic and demographic diversity and local character that stands in stark contrast to the offerings of bland traditional shopping centres. Cultural, health and education facilities are likely to provide a solid bedrock for sustained footfall and we are also likely to see more space being provided for entrepreneurial independent shops rather than the current ubiquity of big chains. These hybrid spaces will have multiple uses including retail, leisure, culture, working, living, education, healthcare, tourism, transport and simply hanging out in attractive places.

It’s a long list, and not all of these will be suitable for every location. In essence though, the aim is to create diversity and vibrancy, which in turn creates a more sustainable community environment that is not overly dependent on a handful of uses or demographic profiles.

The home/office conundrum
One of the great unknowns is the future of town centre retail that relies on footfall from office workers. At the moment around 60% of UK office workers are working from home, but surveys show that the majority of workers would welcome a home/office hybrid working model. According to a recent Cushman & Wakefield report, The Future of the Workplace, of the 40,000 workers they surveyed worldwide, 73% of the workforce believe their company should embrace some level of working from home.

We do not know how this will translate into future demand for office space post-lockdown, but it is clear that office workers want greater flexibility and a better work/life balance. Many employers are developing corporate real estate strategies to decide how to provide for this need from their employees and best serve their clients.

Long-term trends suggest that office and retail will become less important features in cities, the sectors having shrunk from around 80% of all transactions in 2000 to approximately 50% in 2019. Covid has accelerated this, but the office/retail symbiosis still has a future.

After spending months at home, people may want a separation between work and home and space where they can think creatively and collaborate with others. A halfway house between long-distance commuting and WFH could involve local co-working spaces, taking the hitherto predominantly metropolitan WeWork format into suburbs and dormitory towns. Office workers might combine commuting and WFH with co-working “third spaces” closer to home. This represents a great opportunity for investors to repurpose redundant department stores and retail units on suburban high streets into local coworking hubs, as part of a vibrant mixed-use development.

Social value enhances economic value
One of the most tantalising glimpses of what the future may bring is taking place in Stockton, where the town’s shopping centre, a 1970s relic, is being demolished to make space for a riverside park by the banks of the Tees at a cost of £37 million. To some investors this will look like expensive capitulation, but could Stockton Borough Council be on to something?

Today, our cities would be unimaginable without their shared green spaces, many of which are the legacy of improvers and benefactors in the 18th and 19th centuries. They are great examples of long-term sustainable development. To take them for granted as pleasant areas that do not generate much economic value is to overlook their role as life- and health-enhancing social hubs for residential areas, local businesses and tourism.

Common sense and anecdotal evidence suggest that investing in attractive green urban spaces can generate significant lasting economic value but, so far, hard evidence is thin on the ground. Now that sounds like a worthwhile subject for a research project.


Important Information

The value of investments may fall as well as rise and investors may not get back the amount invested.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.

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CLI01842 | Expiry on 01/03/2022


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Published: February 1, 2021
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