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U.K. due for unprecedented supply of new retail space

By Sean C. Kelly

Napoleon supposedly called the British “a nation of shopkeepers,” but if all the projects currently in the pipeline come to fruition, it could more closely resemble a nation of shopping centers.

Some 30 regional centers scheduled to open in the U.K. over the next five years, amounting to 53 million square feet, according to British property agent firm Colliers CRE’s Midsummer Retail Report. The annual report, now in its 10th year of publication, says 18.3 million square feet are already under construction and set to join the U.K.’s existing stock of 750-plus shopping and outlet centers.

This boom is all the more striking for occurring in a country that placed severe restrictions on out-of-town retail development during the 1990s on fears that the downtowns would become economic ghost towns. No such fears this time around, however: Much of this new wave of development would take place within city boundaries, precipitating substantial urban renewal.

But not all of it will get built, some say. The Colliers CRE report includes everything that is on the drawing board, including some projects that have yet to receive planning approval, says Greg Styles, head of the “Shopping Centre Team” at Colliers CRE.

“It covers everything,” Styles said. “There’s a massive amount planned, but the tidal wave of space will be smoothed out by the realities of development. It’s unlikely that all the floor space will get delivered.”

If all that space were to be delivered, it could cause problems, some say. Town Centre Retailing Report, published by retail consulting firm Verdict, points to an “unprecedented wave of shopping center construction” and voices concerns about supply. Annual sales in the U.K. currently stand at £273 billion ($506.5 billion) and are set to grow an average 3.3 percent a year through the next 10 years, as opposed to 4.9 percent annually over the past 10, says Neil Saunders, a Verdict director.

“In the U.K., retailer costs have been going up dramatically against a slowdown in demand,” Saunders said. “It means that destinations are competing against each other for a share of the footfall and a share of ‘spend.’ From a market perception, you can never have too much space. It’s a dynamic of the market: Old space falls away as new space comes in. In terms of economics, though, there isn’t enough growth to go around for all this space. Growth won’t come organically; it will come at the expense of another location.”

Others take a more sanguine view. Michael Gutman, managing director for the U.K. and Europe at Westfield Group, says there is plenty of room for substantial retail development in Britain. “In our view, the U.K. market is a good one in which to operate from a supply-and-demand-of-floor-space perspective,” Gutman said. “In terms of retail space per head of population, the U.K. has roughly a third of the retail space in the U.S. and a half of that in Australia, both markets that we know well, and where we have operated successfully for long periods of time.”

Cities in particular are ripe for retail development, observers say. Major new developments — in Bristol, Exeter, Leeds, Plymouth and Portsmouth, among other cities — by some of the U.K.’s major developers attest to a focus on retail-led regeneration of Britain’s cities and towns, driven by government policy created a decade ago through the “Town Centre First” legislation. These days the retail is often accompanied by an assortment of uses: residential, leisure and even medical services.

For its part, Westfield is developing its Westfield London mixed-use project and another in east London, at the site for the 2012 Olympics.

Some point to the predicted increase in the population of England alone (now at just over 50.3 million) by a further 6.3 million over the next 25 years and say much more dwelling and retail space will be needed. Furthermore, the potential for future development would seem greater by dint of the fact that less than 10 percent of the U.K. is developed.

Andrew Ogg, the managing director at London-based architectural firm Leslie Jones Architects, points out that in 2004 a report for the Greater London Authority called for 16 million square feet of new shopping space to meet demand from the soaring London-area population alone.

Then there are the steadily rising rents. Colliers CRE’s own statistics highlight James Street, in London’s Covent Garden, which hit $990 in “zone-A” (defined as the first square foot behind the length of a store’s fascia) rent, Brent Cross Shopping Centre, in North London, with $752 in zone-A, and Bluewater, Kent, at $725.

Mixed-use development is also being spurred by climbing residential property values. Recent research by estate agent firm Knight Frank puts the very top-end residential properties in London at close to $5,300 per square foot, while average prices in the heart of London’s Westminster are now $1,345 per square foot. With residential property still sought around the country, it is easy to see why mixing retail and residential has become popular among developers.

London is not the only center of development activity, says Peter Courtney, a director at retail leasing firm Lunson Mitchenall, which released a report last year with the British Council of Shopping Centres titled What’s in the Pipeline? According to the report, the Midlands region had the largest amount of development in the pipeline, amounting to around 6.4 million square feet that has planning approval or is under construction, while the northwest, including the cities of Manchester and Liverpool, had the largest amount of retail space under construction, at about 3.2 million square feet.

“If you add up all the space that either has planning permission or is proposed, then that’s what the numbers come to,” Courtney said. “But the truth is that the market will adjust itself. You’ll find that some of the proposed schemes will either be scaled down or get delayed, and some won’t happen at all. Some are competing schemes. So while it’s an interesting sum, it’s a picture of what could happen rather than what will happen.”

Further, says Ogg, there are other reasons that not all the new retail would add to existing supply in any case. “It should be remembered that a large number of these proposals incorporate a renewal of existing poor-quality space which needs to be subtracted from the total.”

Ogg, a leading thinker on urban planning and a former president of retail property organization BCSC (formerly known as the British Council of Shopping Centres), also believes that some pipeline projects will fall away largely because of the rising complexities and challenges of urban development. Adding to this would be the increase in project time and costs. The latter for U.K. town center projects rose from between $1,818 and $2,198 per square meter in 2000 to between $1,983 and $2,393 per square meter in 2003. “It remains a significant issue in the U.K. that the length of time from proposal to delivery is around 12 years, which adds to the development costs,” said Ogg. “Some larger projects incorporating significant infrastructure or transport nodes take around 15 years.”

And lenders are getting tougher, says Styles. “The banks and the institutions are unlikely to fund all of it [the development pipeline],” Styles said. The threshold at which proposed properties have enough tenants signed to begin construction has risen from 50 percent to 65 percent, he says. “As the market gets tougher, investors will insist that developers look for a higher level of certainty, through a high level of pre-lets, and a level that will make their scheme, if not bulletproof, then the next best thing.”

Still, though some may argue over the size of the boom, a boom it seems to be, nonetheless. Many developers have cleared all these hurdles, and their centers are rising out of the ground. Take that, Napoleon.