5 Things You Didn't Know About UK Shopping Centre Investment, But Really Should

Opportunity-seeking investors have sniffed out potential in the ruins of the UK shopping centre sector. But have they really grasped the key to turning a defunct mall into a winning proposition? Lambert Smith Hampton's latest Shopping Centre Futures report may have the answers.

Here are five key takeaways.

1. Shopping Centres Have A Long Journey Ahead

The collapse of chain stores is the main cause of trouble, and there's no obvious cure. As many as 10,059 chain store units closed in 2021. Net growth among independent retailers of 2,157 could do nothing to stop the overall shopping centre vacancy rate rising sharply to 19.4% in late 2021 (according to Local Data Company figures). The figure has since fallen to 19% but that is scant comfort, particularly since so many units remain stubbornly unlettable. In 2021, 6.1% of shopping centre space had been empty for at least three years, representing nearly a third of centres’ total vacant space. This compares with persistent vacancy of 4.7% on the high street; and just 2.9% in retail parks.

2. Shopping Centre Investment Is Up, But Is Still Niche

The first half of 2022 saw shopping centre deals totalling £850M. That’s not a lot, but it’s a massive step up from the £410M recorded in the whole of 2020, and it suggests this year will easily exceed the £1.1B transacted in 2021.

Repurposing is invariably part of the buyer's plan. A survey of industry insiders showed that conversion of empty floorspace to food and beverage uses and non-food retail came out on top with conversion to residential, car parking and workspace grouped together in the following pack. 

But beware. Local property values could nix the more attractive alternative uses. Retail-to-residential conversion works well in red-hot property locations in London and the South-East. LSH said the yield gap is yawning — residential capital values hovering around 40% higher than retail values. But elsewhere the numbers don’t work. In Yorkshire, the north west and north east some average residential values are way lower than average retail values — by as much as 30% in some cases.

3. Love Your Local Council

For this reason, public sector funding and leadership are needed to support projects that cannot purely be driven by commercial considerations, LSH said. So no surprise that local councils bought 13 shopping centres in 2021 in locations as diverse as Sutton, Leicester, Burnley and Merthyr Tydfil. Since 2016, local authorities have been behind more than 1 in 5 shopping centre purchases in the UK. Most of the big demolish-and-start again shopping centre projects are council-led. 

4. No, Seriously, Love Them Lots

Yet teaming up with local authorities could be a winning strategy — or perhaps the only strategy.

Whilst private investors have been conspicuous as they hunt for value-adding opportunities, the bulk of the money, leverage and willpower is overwhelmingly found in the public sector.

On the buyer side, a range of private sector investors are active, some making multiple purchases. These include Signal Capital Partners, Evolve Estates, Redical and London & Cambridge. But patient private sector capital is still shy about buying shopping centres and the LSH data reveals that just 18% of investment in shopping centre repurposing comes from the private sector. The rest is patched together from local council resources, government-backed loans and grants, infrastructure levies and — top of the list — public/private sector partnerships in which the council chips in the land, and the private sector takes the risk. 

5. The Bottom Line

The heavy dependence on public sector funding — 25% of which comes from the government’s Levelling Up Fund and/or Town Deals and/or Future High Street Fund — means that the opaque process of grant applications plays a central role in any shopping centre’s future.

The second round of Levelling Up funding opened for bids last week and closes at noon on 2 August. Bids are capped at £20M unless several local councils are involved. The best advice to potential shopping centre investors is to put this date in the diary immediately.