Don't Talk, Act

The Housing, Communities and Local Government Committee have issued their report on Town centres following a detailed consultation process. Many of their recommendations are welcome but urgent action is now required so I would urge the Government to quickly review the HCLG report and implement their recommendations.

NewRiver participated in the HCLG review and I would like to thank the HCLG for all their hard work in producing their excellent report.     

Allow me to explain why it is that we feel that our voice on the future of town centres is relevant.

Whilst we are a relatively new company, having only started 10 years ago, as a team we have many years of experience operating in the retail real estate markets.

We are long-term investors in a diverse range of communities up and down the UK working with over 60 different local authorities.

In total we own 34 community and convenience led shopping centres, 670 community pubs and 19 retail parks, so we see first-hand the successes and the challenges of UK town centres, which is why we feel well-placed to comment on, and moreover help drive positive action for UK town centres.

I think it’s helpful to outline the context of the market that we are operating in, where we have come from and where we are today.

Ten years ago, we launched NewRiver straight on to the Stock Market and raised ￡25m of capital.  At that time, we had no assets and we were a team of just three people. Fast forward to today, and our portfolio is valued at over ￡1.3 billion and we are now a proud member of the FTSE250 with a market cap of circa ￡650 million.  

Today we collect around ￡120 million of revenue each year from over 2000 occupiers and we administer around ￡25 million of services for those occupiers. We undertake over 300 leasing transactions per annum and we have an active development programme of over 2 million sqft, principally focused on residential helping, in our own way, to create more homes for the UK population.

The common theme across our assets is that they are focused on community and convenience; where the UK shopper spends their weekly household budget on every day essential items.

In my 30 years of operating in retail real estate I have never experienced such negativity towards the retail sector as we have today.

This negativity is expressed on a regular basis in the media, fuelled by numerous high profile CVAs and tenant administrations. However, you can also see the negativity translated in the share price performance of the listed retail REITs and IPD data.

Indeed, the recent data from IPD, a quarterly property performance index, shows that there has been no rental growth within the retail sector in real terms since the early 2000s and, for the first time since records began, industrial yields are now lower than retail yields.

According to IPD, last year capital values for shopping centres fell by 8.7% driven by yield expansion but also a fall in rental values. It is very likely that values will continue to fall in 2019 and rents will fall too, which are under pressure from retailers seeking cost savings.

You may legitimately ask why does this matter?

Well, it matters in the sense that a sector that is under pressure will struggle to attract equity and credit, thus limiting future investment and growth.

Action needs to be taken in order to remove the barriers inhibiting investment into town centres and at NewRiver we have a range of proposals for how this could be tackled.

For me there are two major issues that will need addressing over the next 10 years if we are to have healthy and viable towns and city centres.

The first key issue is that we currently have a significant over supply of retail space in the UK.

For markets to function properly there has to be a balance between supply and demand and in the retail sector right now, supply far exceeds occupational demand which is currently not growing.

My own view is that this excess supply will only increase over the next five years whilst occupational demand will remain flat.

So, we should ask ourselves why we have excess supply of retail?

I started my career in retail real estate in 1988, and some of you may remember that the 1980s was a period that experienced a very significant consumer boom. In response to that, the real estate industry and the major food retailers started to build a lot more retail space both in town and out of town.

The consumer boom ended in a crash in the early 1990’s, at the same time all of the brand-new retail space arrived on the market.

It took years for that excess space to be absorbed, but eventually the supply/demand dynamic equalised.  But of course, this was a time when there were no internet sales.

Incredibly, the increase of floor space continued from 2001 to 2016, where another 10% was added at the very same time that internet sales went from 0% to circa 16%.

Given the increasing volume of sales transacting over the internet, the requirement for retail space, particularly in the last five years, has been in decline. This is particularly so for sectors where online sales have a high penetration, sectors such as fashion, department stores and electricals.

The second key issue is that much of the growth in retail space was in out-of-town locations and, as such, this has simply diverted spend away from town centres which is compounding the problem.

There are towns across the UK where the main food offer is out of town which is fine if you can afford a car to access it. Or, as is the reality for our ageing population, as an older shopper, you may not feel confident driving anymore and so are reliant on walking or reliant on the use of public transport. 

I honestly do believe that many town centres are less socially cohesive today than they were 30 years ago, with affluent and younger consumers shopping online or at out of town retail locations; whereas the older shopper and the less affluent are reliant on town centres, often with less retailing choice.

Town centres have an important role as the place where people meet and socialise - so I think it is very important that we find ways to reverse the years of growing social division.

Additionally, we must be mindful of the profound demographic changes of an ageing society, with increased issues around accessibility, loneliness and the pressure to come on the healthcare system with people living longer.

So, what is to be done?

As I said earlier, for any market to function effectively, supply and demand needs to be balanced.

Unlike the 1990s, both today and over the next five years, there is little chance that occupational demand will absorb the excess space.

Instead, the excess of space needs to be repurposed, facilitating the remaining retail space to be healthier and far more viable.

The issue, as I see it, is that if left to the private sector it will take too long to sort and as such decline in many town centres will continue.

I believe that Councils will have no other choice than to pursue a policy of intervention through the acquisition of strategic retail assets and I am very supportive of this, notwithstanding the recent press criticism of Councils buying retail assets.

It is not just local Councils who have a critical role to play. Central Government must do far more - beyond just business rates reform - to encourage new private sector investment into our town centres and city centres.  

Many good ideas have been identified by various experts that will improve town centres, but I would highlight below a few ideas that are not really being talked about that I think would address the over-supply and protect town centres:

1.                     Awarding town centres the status of Asset of Community Value.

2.                     Planning policy should include a standalone social impact assessment that is inclusive for all demographics. This is to ensure that any new development will be socially cohesive.

3.                      A proper presumption against any retail development that increases the net floorspace in a catchment area.

4.                     Where a planning application proposes to reduce the existing retail floor space to facilitate residential outside London and major cities, the affordable housing requirement should be removed. This will allow more mixed-use developments to be viable and speed up the process of repurposing by removing the endless months of negotiating the affordable housing allowance.

5.                     Section 106 or CIL payments should not apply to developments that reduce the existing retail floor space. This will enhance viability of projects focused on repurposing redundant retail space.

6.                     Stamp duty for town centre retail capital transactions should be reduced to 1% and no stamp duty should apply to lease transactions. The purpose of this is to attract new capital. The Government has in the past used stamp duty to influence real estate markets. A good example of that is the increase of stamp duty for high value residential. This was done to cool that market but equally the Government lowered stamp duty for first time buyers to encourage more activity. I would argue that there is a strong case now for the Government to reduce stamp duty for the retail sector. After all the volume of capital transactions in retail in 2018 was the lowest on record so its not as if HMRC are collecting much revenue.  

7.                      Empty retail units should not pay business rates.

8.                     Encourage free town centre parking by removing business rates for town centre car parks that introduce 2-3 hours of free parking. Click and collect is going to be a growth area of the market and cost of car parking in town centres is a barrier for consumers.

In my view, if the Government plays a proper role in tandem with greater intervention from Councils, the time it will take to reduce the significant and growing excess of supply, will be quicker.

I would strongly encourage Councils to be more interventionist and to acquire strategic retail assets within their local authority area.

That having been said, running a Council requires a specialist skill-set, just as managing retail assets requires specialist skills and experience. I would encourage Council’s to partner with experts who are prepared to co-invest and there is no better partner than NewRiver.