Meet The Low-Key Investor Getting On With The Challenge Of Reinventing Town Centres

Last year, the levees started to break in the world of distressed retail real estate.

Lenders started to get rid of problem loans, at prices where investors were willing to take the risk of buying in a sector where the floor is still falling.

There is plenty of talk about what is needed to save the UK high street. But what is it like to actually take on the challenge? There is no template yet for what works and what doesn’t. It is a sector reinventing itself in real time.

Alterx is one of the new breed of investors that has taken the plunge and bought into the town centre retail sector. Last year it paid £21M, a 10% yield, for Vicar Lane, a 216K SF open-air retail scheme that makes up a big portion of Chesterfield town centre, overlooked by the famous twisted spire of the northern midlands town.

Alterx is a low-key investor based in London and Germany that owns a significant UK land business, but is now also investing in UK town centres. As well as Vicar Lane, it has been linked to a deal to buy the Parkway shopping centre in Newbury from Aberdeen Standard Life. It invests on behalf of individual investors, with past partners including U.S. hedge fund Baupost, and a portion of its profits are ploughed into a charity it has established.

Alterx founder Tom Walsh and Director Bert Broadhead talked Bisnow through the strategy for Vicar Lane, including successes so far and challenges that still remain, and the wider issue of reinventing the retail sector and town centres. Residential conversion will not be a silver bullet; shopping centres are harder to adapt than open-air schemes, and it will be difficult for any one investor to make a big dent in the sector.

Vicar Lane epitomises the challenge facing the UK retail sector, and its story will be repeated many times in the coming years. Completed in the early 2000s, it was previously owned by the Noé family, but was part of a company that went into administration in 2014. Lone Star bought the loan from Aviva in 2015 and eventually got round to starting a sales process in 2018 before selling to Alterx last year.

The scheme has 33 retail units in four blocks and comprises the prime retail pitch for Chesterfield. That prime area is fully let, but like all retail schemes it has been hit by store closures and administrations, including discount retail Bonmarche.

Alterx is looking to change the scheme from what was essentially an identikit town centre into something unique.

“Part of the excitement for us is the opportunity to create non-generic town centres, places that function within their own context and dynamic,” Broadhead said. “The problem is, a lot of the solutions people are proposing are lazy. Just drop them and put resi towers in. If you do that then town centres are lost forever. There is the opportunity to do something awesome.”

To that extent, Alterx has installed a large outdoor screen, not just to provide advertising revenue, but to screen events such as performances from the Royal Opera House in London. It has tied up with a local fashion college to provide space for students, use the screen to showcase work and put on fashion shows.

Rather than have the marketing team use its budget to pay for events at the scheme, it has reached out to local businesses to bring them in and host events that bring together the local community and businesses, such as a wreath-making class with a local florist.

It has worked with local artists, including Village Green, known as the “Banksy of the north” to produce bespoke art of the scheme, and put on other events including classic car shows.

On the retail side, it has leased part of the scheme to local independent retailers, and also invested in its own electronic point of sale system that is provided to small retailers. This makes it cheaper for small retailers to operate, and provides Alterx with data about how well retailers are performing, which it can use to set rents.

It is early days, but the signs are that things are going well. Footfall for Christmas 2019 was up 5% compared to 2018, compared to a national average fall of between 10% and 15%. Car park usage and WiFi logins are also up, and social media interactions are up to 13,000 from zero a year ago.

“The reality [is] it’s going to take a bit longer than 12 months to demonstrate to retailers that we can deliver spend to their stores, as well as just providing the physical spaces, but we’re on the move,” Broadhead said.

The company has signed six new leases in the past year and renewed four, while maintaining 100% occupancy on the prime pitch. Broadhead said the company is trying to move away from conventional metrics of valuing its asset.

“People don’t look at rent per square foot anymore, they look at it on an absolute basis and ask whether they can pay that each year,” he said.

The nature of leases in UK retail is a big bugbear for Alterx, and is holding back evolution and success in the sector. Both owners and retailers are at fault, Broadhead said.

“The 1954 Landlord and Tenant act is a nightmare,” he said.

He gave the example of a local butcher and a big national chain retailer. You might want to lease space to the butcher at a low, turnover-based rent. But if you do, the nature of British lease law and leasing methods means the big national chain will demand the same rent. That makes it harder to lease space to smaller retailers that might drive interest in a scheme, and everyone suffers.

“You are still dealing with an industry that is analogue,” Broadhead said. “Some of these retailers will die before they modernise. The deal with the local butcher and the national chain will need to become a lot more bespoke.”

A big part of the conversation around the reinvention of town centres is about introducing different uses alongside retail: workspace, local services like libraries, and residential. But this must be done with the local context in mind. And the idea that converting a big portion to residential is a solution will be viable in only a few locations, Broadhead said.

“It's not just about retail, it is about bringing employment and local services and culture and education back into town centres — local councils really want to do that, as there is a scarcity of land on the edge of town to build new facilities. People want to work in towns as long as there is an easy way of getting in. But putting PRS everywhere is a mirage outside of London, or building resi that you think you can sell for £400 per SF. The numbers just don’t stack up.”

If done well, these new uses can create a virtuous circle. Broadhead gave the example of how the specialism in agricultural technology at the University of East Anglia in Norwich has driven businesses in the sector to take space in the city.
 
“If you have a local university or college with a strong specialism, you have to bring that into your environment and make it part of your ecosystem,” he said. “If you can incubate businesses then that creates demand for residential, offices and retail.”

The physical structure of retail assets will have a big influence on the ability of owners to reposition them, Broadhead said. In that sense, town centres are at an advantage, as more can be done to open them to the public or redevelop some parts while leaving others intact. For covered shopping malls, it will be a lot more difficult.

“Physically you have to look at how malleable the asset is,” he said. “It might be in a great town with a strong economy right next to the local train station, but if it is a two-story scheme with five stories of car parking on top, the cost of repurposing it is far too great.”

What Alterx is doing at Vicar Lane highlights both the opportunity and the challenge for the retail sector. It is hard. And to do something that is unique and not generic means there is no template that can be rolled out and applied to numerous towns across the UK.

This means it is unlikely that big global investors will snap up large portfolios of retail with a view to transforming schemes. That is especially true when the financial structure of many real estate investors is overlaid upon the financial situation of many retail schemes.

“If you are an investment manager, you need this to be scaleable,” Walsh said. Many town centres until recently were valued at over £100M, and now you can buy them for £25M. For a big capital allocator, that doesn’t move the needle.”

For the same reason, existing owners are highly unlikely to be incentivised to put in the necessary investment required to revive schemes: If the value has dropped from £100M to £25M, it is very hard to ever get it back to the previous level. So why throw good money after bad?

It is also difficult for the managers of closed-ended funds to buy schemes that will require major regeneration, because of the uncertainty about how long a repositioning will take. Walsh said Alterx is not planning to buy retail schemes and hold them forever, but it undertook deals in joint ventures, giving it more flexibility as to when it can sell out.

He said there is plenty available for sale, from private equity firms that bought portfolios of shopping centres with too much leverage, to pension funds and insurance companies with too much exposure to the sector. But once you look underneath the bonnet, not every deal is as cheap as it might seem.

“There are a lot of places that are no longer economically viable,” Walsh said. “There are places where you instinctively think, oh yes, that is a lovely market town, but there is an over-provision of retail in the area and the actual GDP of the area is modest. Unless you have good GDP in a town then transformations are difficult to achieve.”

The business model of real estate firms could also hinder the transformation of town centres, Broadhead said. Development managers who take a fee for overseeing a regeneration process are not necessarily aligned with the interests of long-term owners, be they local authorities who have bought schemes or institutional investors.

“Rebuilding these town centres will need a different approach, not just the approach of a development manager coming in and working for a fee,” he said. “There are a lot of stakeholders, and you need to bring them with you, and create a new town centre community. It shouldn’t be a radical idea, but people need to feel it is their asset. You need to create a real partnership, so that means not just being a distant landlord and just collecting the rent.”

In spite of these challenges, Alterx is on the lookout for more schemes. The returns if new owners get the reinvention of retail right is compelling, and while it will take some time for institutional investors to start buying in the sector again, once schemes have proved they can provide sustainable income, buyers will return.

“We are looking at how big the opportunity in a town can be,” Walsh said. “And if you can create a viable scheme that gives you a 12% return compounded annually, that is good. The capital markets will come back, but only for those assets that are in good locations, well-managed and provide a growing income.”

This is the road town centres will need to follow. The route is long, hard and not clear. But real estate has for centuries reinvented itself. It will do that again.