RTT_Whitepaper_2009_03_09_WhatImpactDoshopVacanciesHaveOnTownsAndCitiesAcrossTheUKAndWhatCanBeDonToAddressTheProblem

Introduction

As the recession continues, there is much talk about how shop closures are changing the face of high streets and shopping centres across the UK.

There is plenty of discussion and research about the effect these will have upon towns and cities.  For example, statistics published by Experian suggest that one in seven UK shops – some 135,000 units – will be vacant by Christmas 2009.

At its latest meeting the RTT debated the level of shop vacancies and the impact these have on towns and cities across the UK.  The RTT considers that the level of store closures on UK high streets and shopping centres and their impact is being misunderstood.

In summary, its view is:

  • Store closures are primarily a long-term structural issue, rather than solely a short-term cyclical effect of the recession.  Shopping habits have been changing gradually, with consumer demands for greater choice, increased price sensitivity and more mobility leaving many local, independently-owned stores unable to compete.
  • This trend has largely affected tertiary property and many of these sites were obsolete before the onset of the economic downturn.  This shift was already in progress before the recession started and retailers have been moving to larger sites throughout the past 15-20 years, creating a greater amount of obsolete property, particularly in tertiary, suburban side street locations.  The current economic backdrop is speeding up the process and drawing attention to the problem through high profile research and media coverage.
  • The RTT believes that this type of property will not return to retail use and would be better converted for other commercial and residential purposes.  The situation will not improve on its own and intervention from Government and local authorities is required to tackle empty, obsolete property through change of use.
  • Structural changes and the shakeout of tertiary stock are also creating winning and losing locations, the latter becoming “tertiary towns” – and these are expected to increase.  85 trading locations now attract half the population for comparison goods shopping, compared with 200 forty years ago, highlighting that this shift has been underway for a long time.  Local authorities of towns at risk of becoming tertiary towns have the challenge of how to handle dwindling numbers of retailers and how to put empty sites to their best use, i.e. catering, leisure, offices, residential etc.
  • Although as mentioned above reports estimate that one-in-seven shops could be closed by the end of 2009, this figure would have been between one-in-eight and one-in-nine in a more benign economy anyway.  And the data which many reports are based on includes properties which are not actually used by retailers.  Many of the “one-in-seven” reports include shops which offer services – such as travel agents, building societies, gyms, fast food outlets, pubs and restaurants etc – rather than those being used for retailing in its most recognisable sense.
  • In addition, insolvencies in the retail sector are not releasing large amounts of property onto the market and certainly not the prime sites which successful, expanding retailers seek.  There is also an inflated view of how much stock a pre-pack administration process releases – typically only 5-10% of the portfolio is left behind for the administrators to deal with – meaning that there remains a significant shortage of the right type of space for UK retailers.

The current level of UK shop vacancies

As part of its discussions, the RTT examined the current level of vacancies, paying particular attention to the different categories of retail property – i.e. primary, secondary and tertiary – which contribute to the overall figure.

According to Experian Goad plans – and research from other organisations tracking retail vacancy levels – vacancies currently stand at around 12%.  Experian estimates that there are 900,000 shops in the UK, which means the current rate of shop vacancies stands at around 108,000, although it has been reported that in some towns this level could hit a rate of 30%.

However, it was noted that less than 4% of all sites are vacant sites in prime locations (see graph below) and there still remains a shortage of property in this category.  This was illustrated by the rush to cherry-pick Woolworths stores in the best locations, after the retailer went into administration in November 2008, despite the current economic difficulties.  The last time such a property opportunity occurred was when C&A withdrew from the UK at the start of the decade.  Reports earlier this year stated that more than two hundred former Woolworths stores changed hands in three weeks with Iceland, Boots, New Look and H&M amongst the companies taking over key sites.

In addition, the low vacancy levels at regional shopping centres such as Brent Cross, Bluewater (Kent), Lakeside (Essex), Metro (Newcastle) and Meadowhall (Sheffield) are also a good indication of the strong demand for high productivity space.  The graph below highlights the divergence between prime vacancies and tertiary retail property in major town centre trading locations illustrating how vacancies tend to be concentrated in the poorest quality stock.

Source:  Property Market Analysis (PMA)

The RTT agrees that there is a definition problem when considering retail vacancy levels.  Much of the “retail” property included in the vacancy figures includes suburban property on side streets, near but not in town centres, which was historically residential but some of which, over time, in order to serve less mobile local communities was converted to retail, food service and local services (e.g. launderettes) etc.  “Retailers” – businesses that sell goods – only occupy about one third of “shop” units and this proportion is even lower in the context of these off pitch/tertiary sites.

Impacts

While agreeing that reports of the level of retail vacancies have created alarming headlines and may be subject to some degree of generalisation, the RTT agreed that empty shops undoubtedly have an effect on a number of different stakeholders, particularly in those towns with a large proportion of obsolescent property.

As part of its discussion, the group considered the impacts which shop vacancies have on different stakeholders: from individual retailers and the industry as a whole to consumers to landlords and local authorities who control properties and the towns they are in.

Consumers

As vacancies rise, the choice of stores diminishes.  Specialist demands, in particular, become less well-catered for, through being provided by fewer stores, although some of this loss is taken up by specialist on-line retailers.

A proliferation of vacancies clearly lessens the experience and enjoyment of shoppers, reducing shopping to a functional activity, rather than the leisure pastime which retailers aspire to create and which is beneficial for both shopper and retailer alike.

In addition, although car borne society has driven structural change there are still groups of people – such as the elderly and children – who are reliant on local facilities and the closure of shops clearly has an impact.

Retailers

Retailers which remain located in “tertiary towns” will find fewer shoppers visiting as they increasingly favour “winning” locations which have a greater choice of shops and goods.  For multiples, this will have an impact on where they choose to locate in the future and for smaller independent retailers the lack of the draw of big names – or “anchors” – may also adversely affect business.

However, a more positive impact for retailers will be a stronger negotiating position on rents, and opportunities for new or better sites in existing locations.

Industry structure

In one of its previous white papers (called Are there limits to the growth of major retailers or will these companies just continue to get bigger?) the RTT concluded that the past 30 years has seen the retail sector characterised by larger retailers and becoming increasingly concentrated, with the recessions of the 1970s and 1990s acting as a catalyst for structural change.

As noted in the initial summary, the RTT believes that vacancies are a symptom of this change in the industry.  According to Mark Teale of CB Richard Ellis: “Market concentration, as chain retailers migrate to the strongest trading locations has been steadily rendering more and more of the traditional unit shop stock tertiary.  Each time the recessionary tide comes in, and stronger retailers flee to higher-productivity ground, more and more tertiary stock ceases to be viable for non-food shopping purposes.”

Landlords

The impact on landlords depends on which type of property is owned.  Institutions, property companies and mainstream investors tend to own the bulk of prime and good secondary property, while most of the tertiary/poor secondary stock is held by private landlords (albeit many different commercial/public sector organisations also own this type of property).

The RTT discussed that vacancies might deter investors from creating new retail space or improving existing sites due to the drop in the likely rate of return.  This could create problems of inadequate or inappropriate supply in future, once the economy is more buoyant.  According to Vicky Redwood of Capital Economics:  “In a way, this is analogous to the problems in the housing market which have prompted a sharp drop in new house building, and in doing so stores up problems for the future.”

There is also a risk that tertiary sites will not be redeveloped because of fragmented ownership and other difficulties associated with their locations, particularly if inappropriate use change constraints are imposed.  One of the underlying reasons for the deterioration in environmental quality in areas suffering from shop stock obsolescence is simply that the returns from shop uses in these areas are often too low for the building stock to be properly maintained. Change of use to property uses for which there is demand is often the only way to preserve the building stock, reversing the spiral of decline.

Local authorities

Local authorities are faced with a number of issues relating to vacant shops and their reaction to the situation is crucial.  The loss of income from vacant stores through loss of business rates has largely been assuaged by charging rates on empty buildings, a tactic which the RTT sees as both unfair and short sighted.  Meanwhile the problem of dealing with or changing a negative image for all or part of a town becomes yet more complex to tackle since the key issue of suitable use is being ignored.

The local authorities of “tertiary towns” need to consider how shops or shopping centres could be used in future and must address the associated planning issues.  In shopping centres and out of town retail parks there is an opportunity to combine units and/or strengthen existing mixes of retailers, which is currently proving attractive to grocery retailers.  But change of use is easier to facilitate where one company is the owner; on high streets where there are invariably multiple landlords, redevelopment or sympathetic re-zoning is a much more challenging prospect.

The environment

The quality of the visual environment deteriorates in areas where a large number of shops are boarded up or – worse still – vandalised.  Longer term, if shops are allowed to decay this can create unsafe or “no-go” areas which have a wider impact upon their surrounding communities.

The economy

Vacant properties reinforce low levels of consumer confidence, if shoppers are faced with boarded up shops each time they venture onto high streets and shopping centres.  However, if these sites could be put to different use there is an opportunity to improve the environment in areas where it is clear that properties will never return to their former retail use.

Conclusions

Following its discussions, the RTT believes that the problem of vacancies is demonstrably not primarily the function of the economic downturn which the headlines and statistics might suggest, but instead a problem with far-deeper roots which requires co-operation between local authorities and landlords to address.

The RTT agrees that suburban tertiary vacancies are a function of structural changes to the industry.  These sites will not return to retail use and hence policy changes are needed from local government regarding “change of use” to facilitate the redevelopment of these vacant sites.

So while the recessionary environment is clearly accelerating closures, it is problems of obsolescence and vacancies in tertiary/poor secondary sites which are set to increase markedly.  In the future the “high street” will be less synonymous with retailing and a shake out of poor quality retail property is potentially a positive change, raising the overall quality of retail locations.  However the RTT believes that many more locations are at risk of unnecessarily becoming “tertiary towns” and local government intervention is required to encourage the right mix, landlord flexibility, parking and other facilities in these “at risk” locations to ensure they are not in this category.  For those locations where it is already too late and futile to attempt to revive the retail offer, local authorities must grab the bull by the horns and re-zone.

At the same time a shortage of prime quality sites remains and can only get worse as development activity continues to decline.  The landlord will retain the balance of power in the landlord-retailer relationship in these locations

For the successful towns – i.e. the winners of the “inter-urban” competition – assignment of leases from the weak to the strong has the potential to strengthen pitches and introduce higher footfall trading activities.  These retailers will demand lower rents and more flexible leases.  However, given the falling market rents in some such locations, this will improve both retailers’ profitability and guarantee the retail futures of those towns which survive with their retail offers intact. 

RTT White Paper June 2009-1.pdf

Date Published: 9/3/2009 5:30 PM

Note to Editors:

The RTT panellists rely on their depth of personal experience, sector knowledge and review an exhaustive bank of industry and government datasets including the following:

Members of the RTT are:

  • Nick Bubb – Independent Retail Analyst
  • Dr. Tim Denison – Ipsos Retail Performance
  • Jonathan De Mello – Harper Dennis Hobbs
  • Martin Hayward – Hayward Strategy and Futures
  • Maureen Hinton – Conlumino
  • James Knightley – ING
  • Richard Lowe – Barclays Retail & Wholesale Sectors
  • David McCorquodale – KPMG
  • Martin Newman – Practicology
  • Mike Watkins – Nielsen

The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance (www.ipsos-retailperformance.com).

First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.

The RTT was founded in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited. The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector. The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.

Definitions:  The RTT assesses the state of health of the UK retail sector by considering the factors which influence its three key drivers.

1.  Demand – Demand for retail goods and services.  From a retro-perspective, retail sales, volumes and prices are the primary indicators.  When considering future prospects, economic factors such as interest rates, employment levels and house prices as well as others such as consumer confidence, footfall and preferences are used

2.  Margin (Gross) – Sales less cost of sales; the buying margin less markdowns and shrinkage.  Cost of sales include product purchase costs, associated costs of indirect taxes and duty and discounts

3.  Costs – All other costs associated with the retail operations, including freight and logistics, marketing, property and people

The Retail Health Index – how is it assessed?

Every quarter each member of the RTT makes quantitative assessments of the impact on retail health of demand, margins and costs for the quarter just completed and a forecast of the quarter ahead.   These scores are submitted individually, collated and aggregated in time for the RTT’s quarterly meeting.  The individual judgements on what to score are ultimately a combination of objective and subjective ones, drawing upon a wide range of hard datasets and softer qualitative material available to each member. The framework follows the example of The Bank of England Agents’ scoring system on economic intelligence provided to the Monetary Policy Committee.

The aggregate scores are combined to form the Retail Health Index (‘RHI’) which is reviewed at that meeting and occasionally revised after debate if members feel it appropriate.  The RHI tracks quarter on quarter changes in the health of the UK retail sector and as such provides a useful and unique measured indicator of retail health.  The index ‘base’ of 100 was set on 1 April 2006.  Each quarter, it assesses whether the state of health has improved or deteriorated since the previous quarter.  An improvement will lead to a higher RHI score than that recorded in the previous quarter, and with a deterioration leading to a lower score.   The larger the index movement, the more marked the shift in the state of health.

The RHI has two main benefits.  Firstly, it aims to quantify the knowledge of the RTT members in a systematic way.  Secondly, it assesses the overall state of health of the UK retail sector for which there is no official data.

For media enquiries please contact:

Max Bevis, Tank PR

Tel: +44 (0)1159 589 840

Email: max@tankpr.co.uk

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