From retailer to landlord

An emerging new trend is starting to surface in the UK when it comes to brands wanting large retail units – they simply buy shopping centres and become their own landlords. 

Ikea is at the forefront of this poacher turned gamekeeper approach. In November the Swedish furniture giant bought Churchill Square, Brighton for £145m, that will see them convert and occupy the former Debenhams unit in the scheme. This acquisition comes three years after they bought Kings Mall in Hammersmith for £170m, creating a bespoke site for their smaller format store alongside transforming the centres shopping space. 

We have also seen Frasers splashing out £58m in March last year for the former Capital & Regional scheme in Luton, now called Luton Point, where GCW provide the leasing advice, with a longer-term view to occupy the former Debenhams. This adds to their circa £30m purchase of the Overgate Shopping Centre in Dundee. In January it was said Frasers was eyeing up the 1.5m sq ft Meadow Hall Sheffield, put on the market by British Land and Norges Bank last year for a reported £750m. 

Across the two centres, Fraser Group acquired over 1.4m sq ft of retail space, providing multiple opportunities for the group’s elevated store concept for its ever growing stable of brands, including its first expanding high-end brand Flannels, USC, Game Belong, Evans Cycles and Everlast Gym.

While a pattern has emerged of more retailers becoming landlords to secure their desired units, will others follow suit? Or will it be a case of repurposing units?

GCW have been at the forefront of the trend to repurpose larger, anchor units within retail developments and town centres, and are now used to seeing a variety of solutions from apartments to hotels, entertainment centres to self- storage facilities or medical heath hubs.

To this end, we are helping to find creative solutions for landlords, such as letting the former Debenhams in Walton-on-Thames to children’s activity centre, Gymfinity, which will ensure that larger units, where they are needed, provide a vibrant mix of uses and play their part in securing a sustainable future for our shopping centres and town centres.

But this is something different.

For some time, landlords have found it hard to find long- term occupiers for former department stores, where there is often limited scope for repurposing, for example to residential, where there may not be enough external curtilage or natural light. Coupled with the limited number of potential candidates for these large units, the costs of putting them into the condition/specification that retailers require, means deals can be hard to agree.

Against this backdrop, the further constraint that can limit the landlord ability to agree terms can come from investor interests where they might be reluctant to input further capital when interest rates are high or where the lender that hold the loans against the asset might be worried about crystalising valuation reductions.

However, we have seen numerous transactions where the retailer has opted to become a landlord to unlock large space and provide bespoke units for their specific needs.

With continued constraints on finance for landlords, is it the more successful retailers who are going to utilise this approach as a new way to secure vacant huge areas occupied on the terms they want? This is clear from the amount of cash spent on just the four above examples of Ikea and Frasers that they will consider this as an option.

This strategy not only allows the opportunity for retailers to acquire the bespoke units they want on suitable terms, but it also presents the opportunity for these retailers. As by occupying a potential problem unit themselves, they will improve the NOI of the scheme as well as giving themselves some breathing space to explore longer term options for the wider asset, or to sell these assets for a profit once they have opened their new stores.

While we expect to see some more of these deals being agreed by retailers, we think they will remain the exception. Apart from the above retailers, there are not that many that would have the means to become a landlord: perhaps Primark or Next or some of the supermarkets?

For the majority, the commitment in taking an entire shopping centre may be a step too far. However, those retailers who need unique spaces, are thinking outside the box to create solutions to meet their everchanging retail requirements, and future business needs, even if it means becoming their own landlords.