Everyone Is Talking About Adding Resi To Retail. Here’s How It Works In Practice

Adding residential space to retail centres is a hot topic right now.

In its strategy review announced this week, Hammerson said it had set up a whole new division to look at adding residential and other kinds of property use like leisure and flexible workspace to 65 acres around its shopping centres.

And at Bisnow’s Retail Revolutions 2018 event last week, panelists pointed to how residential had been added to a town centre retail scheme in Oslo to help solve the city’s housing crisis, with the added bonus of boosting retail values.

There is one company that has been doing this for a while now. NewRiver owns 34 community shopping centres, 21 retail parks and 600 pubs across the U.K. The FTSE 250-listed company also has a development pipeline of 1,100 residential units totalling around 1M SF, which it is in the process of adding to its existing portfolio. In a trading update last week, it said it identified the possibility of adding a further 1,300 units in the medium term. It is also looking to add community facilities like medical centres and even a mini hospital to some of its retail properties.

Saying you will add resi space to retail centres is all well and good, but how does this work in practice? Careful underwriting and creative vision are required. And to revive some of the U.K. town centres that are really struggling, innovation in construction will be required. Here is what you need to know.

Underwriting is crucial

NewRiver looks to buy assets with sustainable long-term income where there is the potential to add residential, but certainly doesn’t bank on it.

“We never price [adding residential] into what we pay for an asset,” NewRiver Chief Executive Allan Lockhart said. “All the assets we buy have to provide a steady and stable income stream, and that is where we make out core return, but we look for assets that might also offer growth through the potential to add things like residential.

“Residential creates footfall through a centre and helps stimulate the nighttime economy, all of which has a beneficial effect on the retail elements of a scheme.”

What to look for

Lockhart said NewRiver tries to think creatively about how and where residential is added to the company’s schemes.

“There could be a car park which is too big and is underutilised, it could be the air space above a centre, it could be adjacent land, or it could be space above shops that is not being utilised,” he said.

But one thing to bear in mind: “You have to make sure that the you can build the resi without disrupting the retail income stream,” he said. For example, it recently added 36 residential units above a Sainsbury's supermarket at its scheme in East Ham, east London, while the store continued to trade.

Residential isn’t a panacea for every scheme — not yet, anyway

Lockhart made the point that, in some areas, it does not make sense to add residential to a scheme, because the price at which you could sell the completed units is below what it would cost to build. When a developer needs existing income to essentially fund build costs, it makes it difficult to buy malls with too much vacancy and add residential to bring the centre back to life.

But methods such as modular and off-site construction have the effect of bringing build costs down, thus making the strategy more viable in areas with lower residential prices. And off-site construction also enables construction to take place without the need to close large parts of a centre down.

“We are actively looking at innovations in construction to bring the cost down, and as we do that, might enable to expand our residential programme,” Lockhart said.

Think flexibly and look beyond residential

Permitted development rights, which allowed the conversion of office space to residential without planning consent, had a big effect to help create more residential space in town centres. The same move for retail could have a big impact, too.

“I would like us to have more flexibility in the planning system, to allow us to bring more residents in to the schemes that we own,” NewRiver Residential Director Justin Thomas said.

He said the developers and owners needed to think flexibly about providing space that could be used both by retailers, for pop-up stores or events, anf residents, essentially reinventing the concept of the village hall.

“That flexibility is beneficial to retailers and the wider community as well,” he said.

Work with local authorities to add services communities need

Other community facilities like libraries, customer service centres and medical facilities could have a big impact, Lockhart said, citing the example of NewRiver's scheme in Wallsend, Tyneside, where it added a library plus other facilities and saw footfall rise by around 20%.

He said working with local authorities as a long-term investor meant that they were willing to provide funding for these services even at a time of central-government cutbacks, which provided a wider benefit to communities and town centres.

“There are local authorities up and down the country finding innovative ways to fund services," he said.

In terms of adding residential, Thomas said local authorities appreciated the wider benefits for communities.

“You are pushing at an open door,” he said.