Reshaping retail

February 2020
About ULI
The Urban Land Institute is a global, member-
driven organisation comprising more than
46,000 real estate and urban development
professionals dedicated to advancing the
Institute’s mission of providing leadership in
the responsible use of land and in creating and
sustaining thriving communities worldwide.
ULI’s interdisciplinary membership represents
all aspects of the industry, including
developers, property owners, investors,
architects, urban planners, public officials,
real estate brokers, appraisers, attorneys,
engineers, financiers, and academics.
Established in 1936, the Institute has a
presence in the Americas, Europe, and Asia
Pacific regions, with members in 81 countries.
The extraordinary impact that ULI makes
on land use decision-making is based on
its members sharing expertise on a variety
© 2020 by the Urban Land Institute. All rights reserved. Reproduction or use of the whole or any part of the contents of this publication
without written permission of the copyright holder is prohibited. ULI has sought copyright permission for all images and tables.
Front cover image: Down Mall Tour 2019, Arkady Pankrac Mall, Prague, Czech Republic. Credit: Shutterstock © arazu
Urban Land Institute United Kingdom
131 Finsbury Pavement Tel: +44 (0)20 7487 9570
London Email: uk@uli.org
EC2A 1NT Web: www.uk.uli.org
United Kingdom
i | Reshaping retail
of factors affecting the built environment,
including urbanisation, demographic and
population changes, new economic drivers,
technology advancements, and environmental
concerns.
Peer-to-peer learning is achieved through the
knowledge shared by members at thousands
of convenings each year that reinforce ULI’s
position as a global authority on land use and
real estate. In 2019 alone, more than 2,400
events were held in about 330 cities around
the world.
Drawing on the work of its members, the
Institute recognises and shares best practices
in urban design and development for the
benefit of communities around the globe.
ULI has been active in Europe since the early
1990s, and today has almost 3,800 members
across Europe with 14 national councils. The
Institute has a particularly strong presence
in the major European real estate markets of
the U.K., Germany, Belgium, France, and the
Netherlands, but is also active in developing
markets such as Poland and Spain. ULI Europe
currently has eight product councils, with the
intention to expand further in the near future.
Across its national and product councils, ULI
holds a variety of educational and networking
events – more than 200 a year – and brings
together some of the industry’s most influential
people while keeping up with the latest trends,
changes, and progressions made in the real
state sector.
More information is available at uli.org.
Follow ULI on Twitter, Facebook, LinkedIn,
and Instagram.
About the ULI Retail and Entertainment Product Council

The retail and entertainment sector is one of the most dynamic in the real estate industry. From shopping centres, high street shops, and out-of-town
retail parks to restaurants, cinemas, and concert venues, ULI Europe’s Retail and Entertainment Product Council examines all aspects of ownership and
operation in this sector. Through a programme of events and original content, the council draws ideas from both established best practices and emerging
trends to provide members with insights into the retail and entertainment market.

The success of ULI’s Product Councils relies on the active participation of our senior executive full members. If you would like to share your expertise
and be involved in shaping the future of real estate in Europe, please contact co-chairs Chris Igwe at chris@igweinternational.com, Andy Watson at
awatson@EuropaCapital.com, or Jacqui Collins at Jacqui.collins@uli.org.

ULI Retail and Entertainment Product Council member companies:

Apollo Global Management Chris Igwe International LaSalle Investment Management

AXA Investment Managers – Real Assets Cycas Capital Meyer Bergman
Benoy DTZ Investors M&G
Benson Elliot Capital Management ECE Newbridge Poland
Bruton Capital Europa Capital Orion Capital Managers
Cale Street Partners Grosvenor PATRIZIA
CallisonRTKL-UK Heuking Kühn Lüer Wojtek Pradera
Capital & Counties Properties Hodes Weill Sonae Sierra
CBRE Global Investors JLL STIR Architecture
Chelsfield JPMorgan Asset Management, Value Retail

ii
Acknowledgements

ULI Europe and the ULI Retail and Entertainment Product Council would like to thank the following companies for supporting this project through
interviews, provision of data, or information for case studies.

Alteris ECE pbb Deutsche Pfandbriefbank

AXA Investment Managers – Real Assets Europa Redevco
Cale Street Partners JLL RivingtonHark
CBRE M&G Savills
CBRE Global Investors Maple Teesdale SIGNA
Chris Igwe International Orion Capital Managers Unibail Rodamco Westfield
Colliers International PATRIZIA

Supported by

Authors
Andrea Carpenter
Alexis Kuskevics

iii | Reshaping retail

Contents

Executive summary 1

Introduction 3

1 Today’s retail real estate investment market 5

2 Catalysts for the investment market 11

3 New strategies for retail space 16

4 Looking ahead 23

References 24

iv
Executive summary
Worries over the health of the retail real estate
sector and the future of traditional shopping
centres started in the United States as failing
retailers exposed an over-shopped market in
light of an increase in e-commerce.
Those concerns have now become increasingly
relevant for the European markets as
uncertainty increases about future successful
locations and retailers, as well as how to adapt
to changing consumer behaviour because
of e-commerce. This has been visible first in
the United Kingdom as retailer bankruptcies
and store closures have led to loss of rental
income and low levels of liquidity in the retail
investment market.
This sentiment is also being felt across
continental Europe where more affordable
rents are seen as providing some insulation,
but there will still be an impact from
e-commerce structural changes in the coming
years.
ULI interviewed 24 members – including
investors, developers, lenders, and valuers – to
get their views on what underlying issues are
creating this illiquidity and what might be the
triggers to unlock the stasis in the market.
The research shows that the complex nature
of the structural changes in the retail industry
is resulting in the market being in limbo as
buyers and sellers fail to agree on pricing.
Investors know they are facing a fundamental
re-rating of the sector but, for many, it is still
too early in the process to make investment
decisions as they cannot be confident about
whether levels of rental income from existing
schemes are sustainable or what volume and
type of space are going to be required by
retailers.
1 | Reshaping retail
Another reason for the lack of movement in the
market is the low interest rate environment.
For those with poorer-performing assets, this
is lessening the pressure to sell as debt is
cheap and operating income is still sufficient
to service the debt. So, even retail property
offering lower levels of income is performing
well relative to other financial asset classes.
There are potential catalysts in the market
that could see more transactions and help
the market find its pricing. The listed market
appears to be a main trigger point; its
transparency means public companies are
under the greatest pressure to sell. However,
even in this part of the industry, only a few
sales in sellers’ non-core countries have
materialised despite discounts to net asset
value often of more than 50 percent.
Instead, the broader economic sentiment
could be a stronger trigger. While operational
performance of retail real estate is currently
sufficient to avoid too much distress in the
market, if consumer confidence is hit further,
this could lead to a faster decline in retailer
performance and consequent losses for retail
property.
Interest in retail is also potentially growing
with the weight of capital in the market. With
yields in retail widening in all but very prime
properties, opportunities in the sector need to
be seen in context with the highly competitive
residential and office markets. Some buyers
might look to take the premiums (alongside the
risk) of retail.
Fresh capital such as private equity coming
to the market to capitalise on the evolution
is struggling to find entry points with still few
pressures on owners to bring assets at low
enough prices to the market. The benign
economic environment means too few good
assets at distressed prices are hitting the
market, while the uncertainty around poorly
performing assets means that no pricing point
has yet been found. Private equity players are
also contending with retail assets they bought
in 2013 and 2014.
Despite the uncertainty, many owners are
looking at strategies to revitalise existing
retail schemes to preserve value as well as
more radical repurposing solutions for those
that do not meet today’s criteria as either an
experience-led dominant shopping centre or
a strong neighbourhood scheme focused on
convenience.
Faced with inevitable declining values, these
moves are defensive. Many are accepting the
surety of lower income through other uses
now, potentially on the back of lower rents,
compared with doing nothing in an uncertain
outlook for economic growth and retail
operating performance.
Those looking to revitalise existing schemes
will need to understand the changing needs
of consumers and retailers when it comes to
physical stores and how to build partnerships
and share data to support distribution for
online sales.
Residential including build-to-rent is currently
a favoured strategy for repurposing, with retail
real estate owners looking at existing land and
buildings they own to densify and bring other
uses to their existing investments. Logistics
is also mooted as a favoured repurposing use
with the increase in the demand for last-mile
deliveries. However, the difference in rental
value means fewer schemes are underway that
repurpose shopping centres.
An empty store on a UK retail park. Credit: istockphoto © John Longley
2
Introduction
The European retail real estate investment
market is reaching a tipping point. In the
past five years, retail transactions have been
slowing to a relative paralysis, starting in the
United Kingdom and now spreading to varying
degrees across the Continent.
This lack of liquidity has its roots in the
uncertainty arising from the ongoing evolution
and impact of e-commerce, and technology in
the broader sense. The assimilation of online
retail is already radically transforming the
real estate landscape, marking out certain
categories of retail assets for continued
prosperity and potentially rendering others
back to, at best, residual land values.
The U.S. real estate market is already
feeling the heat on this trend, and images of
abandoned and derelict shopping malls from
across the Atlantic are enough to prompt
concerns that the ‘retail apocalypse’ is heading
to Europe.
For Europe, reshaping the retail landscape is a
problem with no universal solution – whether
by country, retail location, or type of retail
property. The stasis in the investment market
symbolises the retail real estate investors
grappling with an overhaul of the utility and
worth of the retail assets they own.
Retail real estate owners face a fundamental
change to the risk/return profile of their
assets. To remain relevant, they need to align
with changing consumer behaviour that is
3 | Reshaping retail
seeking experiences and locations with good
placemaking and authenticity, not just those
with as many shops as possible. They also
need to collaborate with retailers, which may
be restructuring their platforms to justify
the right physical presence alongside online
channels.
The higher costs to achieve this for their
consumer and retailer clients will affect
returns as a more operational approach means
intensive asset and property management,
while any move towards shorter leases could
lead to added volatility.
For those looking to repurpose their assets
from retail to other uses, a re-rating of value
is also inevitable. Converting part or all of the
retail space in schemes to office, logistics,
or other uses will in some cases mean lower
rents, affecting the overall value of assets.
These decisions and new strategies are what
sit beyond the market’s current stagnant
phase, and this report examines how values
will reach levels that will give the market the
liquidity and the confidence to work towards
the expected wholesale restructuring.
It looks at why the market is currently blocked
and what will need to happen for retail owners
to either sell or restructure the most affected
parts of their portfolios – and for new and
existing players to step in to buy, revitalise, or
repurpose those assets.
The triggers that will help redress the market’s
illiquidity will likely come from market
pressures on willing or distressed sellers. But
looking longer term, they will also emerge from
how players move forward with solutions to
more closely align the retailer/owner landlord
relationship as well as new strategies for retail
space through reinvention or repurposing.
The unlikely corollary to the current market
illiquidity is that physical retail is far from dead.
It is just slow moving, complacent retailers (and
the real estate that houses them) that will get
killed off if they fail to respond to a faster-
moving life cycle of retail with its constant need
to innovate and reinvent itself.
Although this potential obsolescence is
being fast-tracked by online retailing, the
restructuring is also embedding itself into the
wider themes of better density, mixed use,
accessibility, community building, and being
more consumer-focused.
It means that amid the difficulties of this
restructuring of retail is also the opportunity
to revitalise and repurpose to align with
those wider real estate and consumer trends,
whether that is the move to experiential retail,
building better communities, or addressing
pressing societal concerns such as low
housing supply, especially affordable housing.
InfoBurst Retail 3_Layout 1 28/01/2016 09:05 Page 2
Eat, Drink, Dwell: New Concepts in
Shopping and Leisure
Introduction
The retail and entertainment sector is one of
the most dynamic in the real estate industry.
From shopping centres, high street shops,
and out-of-town retail parks to restaurants,
cinemas, and concert venues, ULI Europe’s
Retail and Entertainment Council examines
all aspects of ownership and operation in
this sector. Through a programme of events
and original content, the council draws ideas
from both established best practices and
emerging trends to provide members with
insights into the retail and entertainment
market.
In recent years, many observers have noted
retailers increasing their use of service and
food and beverage offering as a way of
enhancing their offering. In recognition of
this trend and the impact it will have on
members’ business and investment
strategies, the council commissioned
research into the growing role of leisure
and experience in shopping centres and
city centres around Europe.
This report presents the findings of this
research. Drawing on in-depth interviews
with leading practitioners in the retail sector,
this report explores changing trends in retail
concepts, in particular leisure and food and
beverage offerings, and their real estate
implications. It highlights what is working
well and how current changes are affecting
the vibrancy and liveability of urban retail
developments.
This report is the fourth in a series supported
by the ULI Retail and Entertainment Product
Council. It began with an infoburst in 2016
titled Eat, Drink, Dwell: New Concepts in
Shopping and Leisure, which took an initial
look at the changes in physical retail being
prompted by online retailing. This was followed
up in 2016, when it produced a report called
Ingredients for Success: How food, drink, and
leisure keep shopping centres competitive. It
examined the changing offers in retail around
the leisure and food and beverage (F&B)
sectors.
www.europe.uli.org
Ingredients for Success Trading Up
How food, drink, and leisure keep shopping centres competitive Dining, leisure, amenities, and the new shopping centre
De Heuvel in Eindhoven, The Netherlands. Source: CBRE Global Investors
ULI Retail and Entertainment Product Council
ULI Retail and Entertainment Product Council
View from the top November 2016
November 2017
ULI interviewed eight senior retail executives from various European real estate fund
management and investor companies in December 2015 and January 2016. These interviewees
represented a cross section of retail investors, developers, researchers, landlords, and asset
managers. Interviewees’ interests included both high street retail and shopping centres across
the major markets in Europe. In addition to the interviews, select data analysis was conducted
to supplement interview findings.
Three key findings emerged from the research:
• While retail sales remain the primary source of revenue, retailers and investors are
broadening the definition and array of activities on offer. Food and beverage is the primary
growth area, with additional expansion in services and leisure.
• Full integration between online and in-store retail has become a given, but it is a challenge
to do it well. Offering both is crucial though, as it has a substantial impact on customer
experience and satisfaction.
• The rapid pace of change is exciting, but also risky. New concept stores, locations which
are repositioning, and brands which are succeeding and/or struggling require stronger
asset management, flexibility, and leadership.
In 2017, the Product Council supported a third industry research on the topic and information
report, Trading Up: Dining, leisure, amenities, published in the industry media.
and the new shopping centre. This continued
to examine not only the importance of leisure The research includes four case studies which
and F&B but also the emerging trend of highlight the different strategies owners are
community amenities being incorporated into taking either to enhance their current retail
shopping centres. offer or to repurpose the assets for alternative
uses.
The current report is based on 24 interviews
with those active in the European real estate
sector, including investors, developers,
lenders, and valuers. It also draws upon other
4
1 Today’s retail real estate investment market
Today’s retail investment sector has the
feeling of a market suspended. Characterised
by a lack of liquidity, felt most keenly in the
United Kingdom but spreading quickly across
continental Europe, the turnaround from retail
as the market’s most sought-after sector to
near investment outcast has been swift.
Investment volumes for retail reached their
most recent peak in 2015, hitting €62.5
billion after enjoying a 41 percent rise from
the previous year.1 For the first three quarters
of 2019 , investment activity was down 19
percent year-on-year at €24.5 billion.2
Market cycles show that once the floor for
pricing is found, this impasse will be broken.
However, with this retail reset based on
structural change rather than a market cycle,
the factors to move past this period are more
complex and far-reaching than just who is
pressured enough to sell first.
This chapter looks at what issues are causing
the impasse in the investment market from the
structural growth of the European retail market
to the current valuation and funding issues.
Fast evolution catches up with
the industry
While e-commerce is a current threat, some of
the issues retailers and the property industry
are facing today stem from the staggering
pace of growth of retail property in the past
two decades.
Often pioneered by European supermarket
retailers, a wave of food-anchored shopping
centres were built across the continent during
the late 1990s and early 2000s. By 2002,
there was already around 68 million square
metres of space in shopping centres larger
than 5,000 square metres, and new formats
such as warehouse parks or factory outlet
centres were springing up around them.3
5 | Reshaping retail
These centres had been a perfect match for
the ambitions of both investors and retailers.
Funds scrambled to source big-ticket
prime shopping centres as they invested
internationally in a newly-formed Eurozone.
Meanwhile, retailers expanded rapidly cross-
border, in particular mainstream fashion brands
such as Zara, Mango, and H&M.
In 2019, retail space in Europe had grown to
168 million square metres of shopping centre
space, albeit more recently at a much slower
pace; 2019 looks to have marked the end of
a long expansion cycle with the lowest rate of
shopping centre completions for 24 years.4
The mindset was ‘build, and they will come’,
and for two decades retailers and consumers
did. However, now the advent of online
retailing has made what was a comfortable
fit of retailers to available space is now
oversupplied. It is a new mismatch that has
exposed built-in complacency on both sides
stemming from this expansionist era and now
makes for added complications for both sides
to adjust.
Back then, for retailers with just a single route
to market – physical stores – the ambition to
maximise their footprint across Europe is now
a legacy of oversupply. For some that signifies
a cyclical element to their challenges, as well
as structural. ‘I think what [is] cyclical is the
fact that all these retailers have too many
stores’, said one retailer owner. ‘I think that
that will feel more structural because it will
take quite a long time for it to work through the
system’, said one owner.
The fast growth has left retailers with small
and narrow shops, wide and large ones, all of
which do not match with the whole new set
of needs to fulfil click and collect or be able
to roll out uniform marketing campaigns and
product offers. The shaping of these portfolios
is also far from over, with the improvements
in logistics enabling retailers to reduce the
number of stores even further. This has given
them better insight into what the balance
needs to be between physical stores and an
online presence.
Retail real estate owners also have legacy
issues. The generalised view is that until
recently, they have not taken enough interest
in their two key stakeholders: retailers and
consumers. Instead, the emphasis was on
getting the space filled on a long-term contract
and the rent collected. ‘I think what you see
are lots of the shopping centre owners that
generally asset-collected, then they sat on their
portfolios’, said one interviewee.
This attitude was seen as particularly prevalent
in the United Kingdom, led by the country’s
upward-only rent review system, which always
worked in the owner’s favour. ‘It was landlords
having pretty much all the power because they
had all the locations that retailers wanted to
be in’, said one adviser. ‘So, they treated the
tenants that way in their negotiations and their
asset management.’
This has led to unsustainable rental levels with
which the U.K. industry is now contending.
New retail tenants needed to be prepared to at
least match, if not beat, a centre’s most recent
letting.
In continental Europe, it was more about
occupancy cost ratios and rent-to-sales
ratios, according to one owner. ‘It was an
acknowledgement that a jeweller can afford
to pay more than a retailer of white goods.
But you’re looking at your tenant mix so it’s
appropriate to look at [those ratios], so I think
you have a fairer balance.’
Shopping centre stock per head across Europe

Luxembourg
Netherlands
Finland
Sweden
Ireland
Spain
United Kingdom
Portugal
Italy
Poland
France
Czech Republic
Slovakia
Germany
Romania
Russia
Turkey
Hungary
Belgium
Greece
Average
0 100 200 300 400 500 600 700 800
Source: JLL H2 2019

It has been that flexibility rather than the
turnover element of the rent that was seen
by interviewees to be the saving grace on
the Continent. It has given owners comfort
as to the health of retailers, especially at
lease renewal (although used to support rent
reviews in the past). ‘Mentally you’re prepared,
but effectively it’s nothing new’, said one
interviewee. ‘It’s always a fight, especially with
the larger retailers, to make sure they give you
full access to their numbers, but it is better
than not having anything.’
Holding up the current market
Those longer-term issues aside, today’s
investment market is moving very slowly but
has also left the market with a paradox. ‘There
is no liquidity in the market so you cannot sell
stuff’, said one interviewee. However, adding:
‘Whatever you want to buy today is probably
for sale.’
In theory, pretty much everything is on the
market but just not at the price buyers want to
pay. One interviewee had spoken to an adviser
who boasted of having 300 shopping centres
ready for sale. ‘I mean some people say
everything’s for sale at a price, but I’m not sure
that’s really true. The distress has not really
appeared yet, but my gut fear is, it will.’
That theory is backed up by the number of
deals failing. One interviewee estimated two-
thirds of transactions brought to market had
failed.
Others see a contagion in continental Europe
and link that to a withdrawal of lending from
the sector. ‘I think there’s a direct correlation
because investment volumes fell off a cliff in
continental Europe as well at around the same
time. A number of banks said: “We’re just not
going to lend in that space”’, said one valuer.
Banks confirm that sentiment has given
them real pause. ‘We’ve spent probably the
last three to four years walking away from a
large number of retail deals, because we just
couldn’t see where they were going’, said one
lender, adding that was in the United Kingdom
mainly but working towards continental Europe.
Either way, bad news has chilled prospects
for new lending from international banks –
including those from the United States and
Germany – right across the continent. ‘We
did a number of valuations of good secondary
[U.K.] retail for a German bank. They were
so shocked by the move in the values that it
alerted their head office in Germany’, said one
interviewee. ‘We then saw that ripple effect
across into other markets in Europe as well.’
6
Most markets on the Continent expect to feel
the investment markets tighten. For some
active in Germany – the market to watch after
the U.K. with its higher penetration of online
retail – interviewees report a functioning
market but acknowledge a potential longer-
term problem. ‘The reason why we have
moved from where we have been 12 months
ago to where we are today is not today’s
performance; it’s the expected performance
in the next five to 10 years’, said one. Others
point to a strength in the market that many
retailers are family-owned business, which can
more easily and flexibly react to that market
environment.
One of the main problems is that pricing is
not adjusting quickly enough to who is now
expected to be the owners of these assets,
according to an interviewee. ‘The lowest cost
European retail property investment volumes, € billion
20
18
16
14
12
10
0
2010 2011 2012
United Kingdom Germany France
Source: Real Capital Analytics.
7 | Reshaping retail
of capital [for retail] is between 15 and 20
percent internal rate of return. Then you’ve got
to price the asset to reflect that. Now these
super assets [that] have always been valued on
a basis of a sovereign wealth fund will come in
and pay a keen yield.’
Buyers are clear in what they think are
desirable investments: large destination
centres that dominate their catchment or
smaller neighbourhood centres that provide
convenience shopping to a regular local
clientele. ‘It’s big lumps of prime that are being
sold and that mask a lack of transactional
activity in the squeezed middle’, said one.
It is that ‘lost middle’ where the main problems
already exist or are to come: middling centres
that fail to have the pull of a destination but
are too much effort for local shoppers. They
2013 2014 2015 2016
Southern Europe Nordics Central Europe
languish on the edge of towns and cities or
are washed-up city centre schemes that have
been too large and ambitious for the local
catchment. ‘I’d rather own the one asset in
a fourth-tier city, than the fourth asset in the
first-tier city right now’, said one adviser.
With so much structural uncertainty, the
priority of all buyers is to try to buy the good
stuff cheaply. Unfortunately, ‘Good quality
retail doesn’t look like a bargain yet’, said an
interviewee.
For everything else, there is just a lack of
visibility. ‘[Buyers] need to see where values
are. But the good stuff is still commanding
pretty good prices’, said one investor. This has
been reinforced recently with shopping centre
deals at around a 4 percent yield in Italy and in
Paris, France.
2017 2018 2019
Benelux Other
Cycling race in Arkady Pankrac shopping centre in Prague, Czech Republic. Credit: Shutterstock © David Krasensky
Pricing retail assets
At the heart of this illiquidity is the current
inability to price assets, an impasse that is the
result of a complex set of interlinked levers
around projections for valuation and income,
funding and sentiment.
What all players are contending with is a
fundamental re-rating of the sector. It is still
early to find a landing point for pricing in the
shakeout of too much space which may no
longer be fit-for-purpose, and knowing how to
identify the resilient retailers.
Sentiment might be the least technical aspect,
but its collateral damage is already evident.
Headlines from the United States lead the way.
Its retail apocalypse is well acknowledged
with the number of shopping centre closures
expected to hit 25 percent of all stock5 by
2022. In 2019, 9,200 stores closed in the
United States, 59 percent higher than 2018.6
Naturally ahead in the cycle, how this trend
plays out in the United States is already
proving meaningful for Europe, despite this
being an example of extremes with America’s
hugely over-shopped market, many out-of-
town shopping centres, and its high levels
of e-commerce. ‘As the world has become
much more global, you have the same capital
providers for different parts of the world’, said
one fund manager. ‘Anyone that’s licking their
wounds for bad real estate deals in the U.S.
are telling their operating partners, “Don’t do
any more retail, because we’re getting hurt
elsewhere.”’
For the United Kingdom, the closest retail
sparring partner of the United States, a level of
concern may be justified. The U.K.’s shopping
problem is also chronic. It lost more than
1,200 stores in the first half of 20197 and
shares similar characteristics with the United
States in being relatively over-shopped and
– alongside Germany – having the highest
levels of online retailing in Europe. Many of its
assets are also out-of-town shopping centres.
According to one interviewee, ‘Investors are
nervous because for the retail capital markets,
this contagion has come over from the United
States into the United Kingdom and will
probably grip the continent.’
8
Net initial European prime retail yields
2005 2006 2007 2008 2009
High street Shopping centre Retail warehouse
Source: JLL Q4 2019.
It is valuers who are being singled out to make
sense of market pricing, but with very little
evidence. The few deals they have to review
provide them with little comfort; those that are
selling are doing so under unique pressures,
for example, listed market players which are
under higher levels of public scrutiny.
‘We’re wary of evidence coming through
that’s a little bit tainted, that’s not quite
arm’s length. What we don’t want to do is to
jump to the same conclusion and effectively
write history slightly differently because we
think it’s happened in the U.K., it will happen
everywhere’, said one valuer.
More evidence is available in the prime market,
mainly through a couple of deals with keen
9 | Reshaping retail
2010 2011 2012 2013 2014
yields in France and Germany, but valuers are
still wary. ‘We just want to be careful that we’re
not rushing too far ahead. We’re aware that
sentiment in continental Europe is also weaker.
I think where you’re talking secondary assets,
then definitely views are to move out largely
on sentiment, but for the really good stuff, the
really prime kit, we’ve only started to move that
very little at the moment.’
However, with the limited amount of evidence,
deals that surface towards the lower end of
prime could lead the market disproportionately.
‘There is a danger that [lower end of prime]
gets bought up quite cheaply, and, at that point
people say, “Well, that is the evidence in the
market, and that is where the investor is at.”
And then you would see yields step out.’
2015 2016 2017 2018 2019
The instability in the system is the rental
income. If there is a main moving part that
needs to settle to secure new pricing levels,
then it is finding what will be an affordable and
sustainable rent for tenants for the longer term.
Again, this is most visible in the United
Kingdom where the upward-only rent
reviews have kept rents unsustainably high,
adding to the pressure in a challenging retail
environment. In an attempt to cut costs
and, in some cases, stave off bankruptcy,
retailers have looked to company voluntary
arrangements (CVAs) to renegotiate rents with
landlords and close non-performing stores.
These legal restructuring arrangements have
been successfully negotiated by large high-
profile retail chains, effectively destabilising the
reliability of the rental levels. This is evidenced
by fashion retailer Next, which said in its
2019 half-year results, rents were falling by
an average of 28 percent when it renewed
leases.8
This round of deep rental cuts for U.K. retail
owners has also allowed healthier retailers
such as Next and Primark to realign their rents
with those new levels obtained by struggling
retailers on the back of CVAs. Next expected
to open twice as much space in 2019 as
previously anticipated because it had secured
large rent reductions on stores it originally
planned to close.9
Primark offered landlords extended leases or
investment in refurbishing stores in exchange
for rent reductions of up to 30 percent.10
‘But that’s fair enough, right? Why should
they pay? I completely sympathise with the
argument. The issue is every single CVA has
been struck on totally different terms, so what
is now a fair deal?’, said one fund manager.
This undermining of the rental base has wiped
out the ability to have a clear understanding
of future income. ‘No one believes the current
levels of income are sustainable’, added the
fund manager, ‘so the income is doubted. And
then the yield is also doubted. Even if you can
get your head around that income’s going to
fall, it’s very difficult to know what it’s going to
fall to. So what are you putting your yield on?’
For both buyer and lender, the information
just does not exist on which to make sound
investment decisions. Without good information
on retailer performance, the United Kingdom
has been left running blind without data on
how tenants are performing. ‘We don’t have
up-to-the-minute data on the retailers and
how they’re performing’, said a valuer. ‘We
genuinely don’t have the information on how
the schemes are performing, either. I mean if
we had that at our fingertips, then I think the
industry itself can react, and move more fluidly,
and not this knee-jerk reaction.’
Banks in Germany are already much more
inclined to be cautious, according to one player
that was refinancing a retail portfolio. ‘I would
say if we would own all out-of-town shopping
centres, I would probably have a much more
difficult time. But since we are talking about
inner-city retail, banks are less worried.’
Meanwhile, lenders are doing their own
calculations based on a much narrower view.
‘We work out who do we think in that scheme
is probably a viable business, and then we
value it off that income and we ignore the rest.
So, [we are] valuing what they would see as
the core income off a higher yield than we see,
and that means there is still quite a lot of pain
out there to come.’
Without that landing place for rents, the
stumbling point will remain in place and is
something the retail estate industry can neither
anticipate nor contribute to solving. According
to one lender, ‘There is an assumption that
retailers know what they’re doing, and what’s
being borne out is that the vast majority of
them have forgotten what their [rental] bases
are and it’s just been mass growth. They’ve
slightly lost sight of the bottom line, so trying
to get hold of what your [rental] income is, is
very difficult.’
Within the U.K. market, this also has to be
considered in the wider issues of overall
affordability, with U.K. retailers subject to
business rates on their premises. These are
based on the estimated rental value of the
property, so have been calculated on the
high rents that retailers are finding difficult to
pay. Adding in the economic fallout from the
protracted Brexit negotiations, U.K. retail has
found itself in the perfect storm.
Although the specifics of the U.K. market are
not the same in continental Europe, there are
transferable lessons. As retailers rebalance
their portfolios across the whole of Europe,
they will focus more on affordability. One
owner noted: ‘We just did a lease renewal for a
[tenant’s] units in retail parks across Belgium.
The aggregate rent is about the same, but
some went down considerably and some went
up considerably just because the profitability
in each one was so different to what it was 10
years ago.’
10
2 Catalysts for the investment market

How the investment market moves ahead is
still difficult to predict, given the nature of the
structural change. This chapter looks at the
catalysts that are most likely to shift pricing
and bring more liquidity to the retail investment
market. It also considers other factors that
could play a role but are being held back by
their complexity or market dynamics.
Listed market
With the higher levels of transparency, many
interviewees see all eyes are on the European
listed market as the most likely trigger for sales
and to move pricing in the market. ‘There’s
such a monster discount [to net asset values],
even if people don’t believe that the values are
still marked out as much as they should be,
there is still a large discount’, said one.
The retail problems are not seen as any
worse in the listed market, just that with the
public scrutiny, it is prone to over-reaction.
‘It’s a little overboard, but then again, that’s
what you have, right? Because listed provides
liquidity and fairer transparency’, said another
interviewee, adding that aggressive discounts
were more likely in the United Kingdom than
continental Europe.
However, for owners that see analysts who are
‘ultimately dictating’ information in the market
about how companies are performing, that can
be frustrating in times of uncertainty. ‘They
don’t understand that one shopping centre
is very different to another one, and that this
asset actually performs bloody well and will be
there forever. Yet that has no real impact on
their share price’, one complained.
This is still the case despite some companies
proactively making changes such as selling off
shopping centres in non-core markets, entering
joint ventures with institutional investors on
assets, and unveiling plans to intensify land
use on many sites (see page 16).
With the discounts leaving the listed
companies hamstrung both from asset and
corporate positions, further activity could be
at either level. Selling additional assets would
give them liquidity, but the sale values of
many of these assets are already going to be
hugely depressed. ‘They’re stuck in a scenario
where they can’t raise equity and they can’t
raise debt. At some point, something is going
to force the sale which is going to cause the
thing to come crashing down’, predicted one
interviewee.

When AXA IM bought the asset in 2018 for

Case study:
UBBO, Lisbon, Portugal
When it opened in 2009, Dolce Vita Tejo was
considered a prominent addition to Portugal’s
shopping scene. However, just over a decade
later, the changes being made at the 80,000 -
square-metre shopping centre shows why even
major destinations need to transform to survive
changes to the retail landscape.
In the face of changing consumer habits and
an increase in e-commerce, AXA Investment
Managers – Real Assets has repositioned
Portugal’s second-largest shopping centre to a
‘shopping resort’, with a focus on experience
for its visitors.
€230 million, 90 percent of the 274 units were
let but the investment manager was keen to
protect the centre’s dominance by continuing
the repositioning that the previous owners
had started to put in place. This has seen an
increase in lettable space, including new units
as well as a new entrance to increase visibility
and improved access via a new bus stop.
Now rebranded as UBBO, the resort offers the
three pillars of fashion, food, and experience.
Across the centre, the emphasis is on leisure
and flagship stores as essential elements
for future performance. It has brought new
entertainment offers to Portugal including a
water park, virtual reality games and flight
simulators, along with a 5,000-square-metre
Kidzania theme park. A UCI cinema was added
as well as a terrace and playground inspired by
beach environments. UBBO’s climbing wall. Credit: AXA Investment Managers
- Real Assets

11 | Reshaping retail
For another interviewee, it was less an overall
corporate issue and more about individual
assets. ‘I don’t think the big ones are at a
point financially where they are going to be in
a forced liquidation, but actually there will be
some huge [debt] breaches.’
The listed companies are also subject to
grander speculation around potential take-
privates, and some interviewees suggest
they might do share buybacks or seek an
institutional partner to take some equity.
However, big moves require huge
commitments. ‘Take-privates are really hard’,
said one interviewee, with successful bids
needing full buy-in from the management and
owners.
Wall of capital
Low interest rates have seen strong capital
flows into real estate. This has resulted in
capital pouring into better-performing sectors
such as logistics, offices, and residential.
However, as these sectors become more
expensive, this could improve the relative risk/
return prospects of retail compared with other
sectors.
It means some players have 100 percent
equity and are ‘ready to deploy’ into retail
for the long term. ‘The alternative that you’re
seeing is people holding cash at a negative
interest rate, then you almost rather have the
certainty of losing a little than the risk of losing
more’, said one. ‘All of a sudden taking the risk
on [a potential] eight, nine, 10 percent yield
and secondary retail doesn’t sound so crazy
after all.’
As the cycle continues, retail is now being seen
in the context of an increasingly competitive
market of offices and logistics, with yields
in retail widening in all but very prime. ‘For
sheds and half decent offices, it’s moving in
the other direction. Just the passage of time
and the absence of debt will make for a little
opportunity there. I think I’m prepared to put
money where my mouth is, but not for a year
at least’, noted one investor.
Others see the current investor backlash
against retail as going in their favour, under the
presumption that investing in retail will yield an
upside if it goes well. ‘I think eventually people
will probably take a breath and say, on relative
terms the risk of these overpriced other assets,
compared to the premium that I get when I buy
undoubtedly risky retail assets, there’s a huge
premium.’
For those already owning shopping centres,
the macroeconomic environment amid the
current instability can also be a good reason
to hold onto retail assets rather than trade into
logistics at a lower yield for an asset with no
alternative use. ‘I would think twice as long as I
have on the retail side dominance in my hand,
time on my side, and a manager with me who
can show me real income over time.’
Macroeconomic prospects
While many of the triggers in the retail industry
are internal, the macroenvironment, including
the health of consumer spending, could put
further pressure on retailers, which could
exacerbate the restructuring for retail real
estate owners.
The uncertainty in the U.K. economy continues
to be a key concern; 2019 was the worst year
on record for British retail, with sales falling for
the first time in 24 years.11 ‘I think the retail
occupational sector is fragile for sure. Any
further duress on the consumer, any further
reining in of retail spend is likely to put further
pressure on the retail [real estate] sector’, said
one adviser.
If the economic picture worsens and
consumer spending drops, operational retail
performance will be hit hard and could lead
to the performance of retail assets spiralling
downwards faster. This is likely to result in
more distressed assets for retail owners and,
for now, not knowing the direction of operating
income means making plans to repurpose or
reinvigorate existing assets more difficult to
justify.
However, the same interviewee said that an
economic downturn would rid the market of
its ‘zombie retailers’ that many do not believe
in for the long term. It would accelerate
the ‘painful adjustment’ needed between
oversupply of space and changing demand
from retailers, which has already been seen
in the United Kingdom. ‘I think the market’s
needs it actually, because that’s when you
see the downsizing of retail portfolios and the
right-sizing.’
12
Other factors
This section looks at the current role of private
equity, traditional owners of retail real estate,
and banks. All three have the potential to
contribute to unlocking the market but are
being held back by the complexity of the issue
or market dynamics. This could change as
other catalysts start to move the market.
Private equity
The changes being seen in the retail market
should fall right into the hands of private
equity players. As a macro play with obvious
disruption, and with values falling and pressure
to sell, it sounds within private equity’s modus
operandi. But is everything in place for them to
achieve high returns of 15 percent plus?
Despite the promising setup, retail is just not
that clear cut for private equity. The complexity
of the structural rather than cyclical nature of
the changes means that not just higher-risk
capital is needed but also the right resources,
timing, and long-term view. Ultimately, private
equity is finding a route in much more difficult.
‘They’re looking, but they haven’t found
anything that on a risk-adjusted basis has
value’, said one interviewee.
One major issue, particularly in the United
Kingdom, is that private equity players
already have significant exposure to retail
after investing heavily in 2013 and 2014. At
the time, this was a promising recovery play,
but the emergence of these structural shifts
means they ended up investing in a period that
was the cyclical peak for secondary shopping
centres.12
13 | Reshaping retail
It was also a period when more debt, including
mezzanine lending, was available. With the
steep fall in values, two high-profile players
have already ceded control of their portfolios to
banks in 2019. Others bought shares in listed
companies and are nursing losses from those
investments.
Private equity also has the same struggle as
everyone else looking to invest. Even with a
higher-risk outlook, they still want a floor from
which to price. One interviewee noted: ‘They’ve
got to get comfortable with calling the bottom
of a market which is changing structurally as
well as cyclically? There isn’t an easy answer
to that.’
Further, the expected levels of distress are just
not there. Pricing has not fallen sufficiently and
operating performance is still relatively good,
which means the upside from any repositioning
or repurposing is not large enough given the
risks involved.
Private equity players are caught between
wanting to buy better assets that have been
hit by sentiment at low prices and this being
where all parts of the return spectrum are
looking to buy. The debt markets are also not
in their favour because they can achieve the
same levels of maximum 50 percent loan to
value that other players can also negotiate.
The lack of private market opportunities
explains private equity’s interest in the listed
sector, where there is more public pressure on
real estate investment trusts (REITs) to offload
their better assets. ‘The pricing of these assets
is going down and that’s where the opportunity
is. If you can get good assets to keep the
cashflow growing, then you could probably
make some good money.’
Other private equity players without legacy
portfolios are waiting in the wings for the
good secondary to fall to the right prices. One
consultant said: ‘We’ve spoken to a number
of parties already – private equity money
generally sourced out of the U.S. but not
exclusively – who are starting to deliberately
look at secondary retail in the U.K. They want
to move first to get what they perceive to be
the best bargains.’ Even then, they add that
‘secondary’ is a broad category, and they
are looking for assets where performance is
holding up.
In reality, private equity players have not found
themselves looking for entry points in a macro
sector play, but in the weeds of a structural
change where every asset is a challenge.
‘There’s a quick realisation that looking at
things on the back of a cigarette packet and
getting into the nitty-gritty of a shopping
centre, you can be 90 percent out. If you’re
looking at sheds, you can be pretty confident
there’s going to be a maximum 5 percent
differential. But these are really challenging
assets.’
The overall complexity needs a long-term
outlook which, by nature, private equity does
not have, with exit and liquidity being a key
assumption. ‘If you’re repositioning something,
it means you have to go through a planning
process, you’ve got to go through construction,
or you might get planning and sell it. But your
business plan could easily be longer than five
years, and that’s not a comfortable place for a
lot of private equity’, said one fund manager.
Shopping centres are seeing an increase in leisure uses such as RockUp climbing adventures at Intu Watford, United Kingdom. Credit: Intu
Traditional core owners
With the clear shift in the risk profile for retail,
the traditional, more passive, core investors
that own retail assets in the private market are
assessing the state of their retail portfolios.
This includes insurance companies and
pension funds, open-ended funds and family
offices.
The outlook for them has three facets: the
decline in value due to the structural change
in retail; the fact that greater resources and
specialist skills will be needed, because more
operational assets means more intensive
operational management, and whether the
investors have the resources to repurpose or
reinvent to create and protect asset values.
In the short term, it is whether the pressure
on valuations and the challenging outlook will
force sales now. One interviewee was clear
that these types of investors would certainly
‘rather not be involved in the evolution.’
One distinction is how the assets are owned.
Strategies will likely differ for institutions
owning retail property directly or through
funds.
Either way, they are currently protected by
low interest rates, which have helped reduce
pressure to decide. However, these only mask
a situation that is not cyclical and is only
going to get worse. ‘I think some of the more
institutional owners have made a mistake by
not trading out early and accepting what the
market might pay, and they’re going to pay the
price now’, commented one interviewee.
Another interviewee added: ‘In some cases
they’re trying to get out but they can’t. Others
have decided to lock down and just ride it out.’
Their view is that even if retail ended up being
valued at 10 or 11 percent [yield], the value
might be depreciating, but it still provides a
good income.
14
Institutions owning directly tend to mark to
market; they also face the issue that if they
sell one asset, they will take a paper loss right
across their portfolio. ‘What is challenging
for them is to bite the bullet and do that. If all
their peers are doing it, they will, but no one
wants to be a leader’, said one retail owner.
While they have a longer-term view to consider
repurposing, few are seen to have the mandate
for development or have the skills in house.
For those institutions that are trying to sell,
potential buyers are finding it difficult to get
finance, and what is on the market are poorer
assets, which buyers are not seeking. ‘They’re
looking [for] good-quality assets that are
coming to the market because of necessity
that might not have done previously’, said one
interviewee.
In the U.K. market, the news that one balanced
fund for individual investors has been frozen
for redemptions since December 2019 will
continue to cause reverberations through the
market. The fund closed because it was unable
to sell property at a rate to meet investor
redemptions. As well as political uncertainty,
its problems were the ongoing structural shifts
in the retail sector. It has already started to sell
its retail parks, one part of the market where
values are holding up better. Other forced
sales could follow, which will influence market
pricing.
15 | Reshaping retail
Banks
With the consistency of income from the
retail investments being the sector’s greatest
concern, banks could trigger sales from
borrowers as assets’ covenants are breached.
However, these pressures currently feel
far from immediate, helped by the benign
macroenvironment.
‘We’re starting to see distressed situations’,
said one interviewee. ‘I think the banks are
holding and probably not acknowledging quite
a bit of distress that will work its way through
the system over the coming months and years.
There’s a lot more distress in the U.K. and
there is less on the Continent.’
For retail assets already on banks’ books,
interviewees report a generally measured
approach, helped by lower interest rates.
‘Banks that have existing exposures are just
trying to get a bit more equity put into them,
but they’re being quite sensible around that,
and perhaps just monitoring the loans a lot
more’, said one banker.
Another lender said: ‘To be candid, yes, we
have some assets that have some struggles
going on, in which we’ll have to work with
our borrowers to either be patient, give them
an opportunity and be supportive of them,
provided they’re willing to continue to support
the asset from an equity perspective.’
3 New strategies for retail space
Although liquidity might increase, further
catalysts could be provided as owners and new
buyers start to implement successful strategies
around revitalising or repurposing retail that
will set the standard for potential income
streams and future value of assets.
This chapter looks at how this will be achieved
through improving existing retail and also how
the industry is approaching repurposing.
Improving existing retail
While there is a rush to repurpose, for some
owners the right step is not to give up on the
existing retail use. This is essential for those
struggling schemes with the right foundations,
such as a good catchment and location, but
Increasing density of
retail sites
With the REITs under greater levels of
scrutiny about the performance of their
retail portfolios, two players – Intu and
Unibail-Rodamco-Westfield – are looking
to their existing landholdings to drive more
shareholder value. Both have announced
ambitious plans to increase the density
of existing retail sites, which also allows
them to diversify and increase their income
streams.
In 2018, Intu identified space for up to
6,000 homes for rent on land it owns
across eight of its sites. Now, it has unveiled
plans for its first project to build 1,000
homes next to its Intu Lakeside shopping
centre in Essex. A car park and part of the
House of Fraser department store will be
demolished to provide a mix of single-
person and family homes, as well as public
and private open spaces and lifestyle
facilities. Intu is currently conducting a
also successful centres that might still suffer
retailer failures, lower footfall, and declines in
values.
Many of the changes are physical as owners
are persuaded to bring in new uses and
reshape their centres. ‘We said, “Actually,
we think you’re missing 10 retailers that
should be in here”’, said one interviewee, who
recommended reconfiguring the space. After
bringing in the new uses, they quickly did four
leasing deals.
In many cases, fundamentally changing the
configuration of shopping centres has merit.
Many traditional anchors such as electrical
retailers and department stores are gone and
being replaced by F&B or leisure uses.
Cherry Park, Stratford, UK. Credit: Unibail-Rodamco-Westfield
public consultation on the project as it seeks a
joint venture partner.
At Westfield Stratford City, Unibail-Rodamco-
Westfield is developing London’s largest single-
site private rented sector (PRS) scheme. It will
partner with Canadian public pension fund PSP
Investments and global real estate company
QuadReal Property Group, in the €750 million
project to deliver 1,200 new homes and other
This potentially has financial consequences,
but anchor stores also tended to offer owners
footfall rather than financial value through rent.
‘I think in the long term there would be more
resilience in a more diverse income stream
[from more anchors]’, said one consultant.
Other owners are pushing remodelling and
refurbishment strategies further to make
aesthetic improvements that refresh the centre.
‘I’ve seen many major owners in various
different countries who’ve actually done
things that are not that expensive, but they’ve
somehow flipped a switch in the consumer’s
mind’, said one interviewee.
amenities including a gym, swimming pool,
workspace, and public areas.
It says this strategy to increase density is
aimed to increase the attractiveness of
already well-connected retail destinations
by adding offices, residential, hotels and
other uses where relevant. It says it will join
with strategic capital partners to reinvent
city districts.
16
Bringing in new uses has been an iterative
process as owners recognise that physical
retail can bring experiences that online
cannot offer, as seen in the UBBO case study.
Strategies to increase dwell time include
bringing in more food and beverage, leisure,
and community uses. ‘Gastronomy does play
a bigger role, but there are other new retail
concepts out there, which we are working with
and which are performing still great. There are
definitely entertainment components to it’, said
one interviewee.
However, these will not attract new tenants
if centres are not offering the full package of
services and amenities. ‘They also need to
make a commitment and need to believe in the
story. You cannot change a centre if you just
change one tenant. You need to also make an
investment in the stage from which the whole
concert is playing.’
In France, the Le Conseil National des Centres
Commerciaux, has attributed an 0.8 percent
increase in retail sales in 2019 to the fact that
owners are responding by modernising centres
and bringing in more F&B and leisure uses.13
Pop-up store for the artist Banksy in Croydon, United Kingdom. Credit: Shutterstock © Bruno Mameli
17 | Reshaping retail
However, repeating successful formulas
can also quickly deaden the trend, such as
with food halls. ‘As soon as you [replicate
it], the food hall operator loses all forms of
authenticity, they expand too quickly, and it
dies’, said one owner. ‘People have to get past
the point that it’s no longer about collecting
rent; you’ve got to be an active operator. And if
that means creating your own food hall brand,
so be it.’ However, this route might not be
financially viable for some, and scale exists to
share and dilute costs.
That also means working hard to provide that
local authentic placemaking and not scaling
up marketing and events across different
centres. An interviewee noted: ‘What you get
is the same events being recycled around the
country, and they’re pretty generic and pretty
boring, and they’re not relevant. Nearly every
town has a decent community. There’s already
an organic set of events, and what places
need to do is bind themselves to those local
communities.’
Working with retailers
Part of providing the right environment
for tenants in the future will be better
understanding retailers’ future needs in an
omni-channel world, and how that relates to
the physical stores.
Concerns that physical retail is secondary to
online are long gone. Both retailers and owners
need to understand what the new relationship
is. ‘Online and stores work together and
they’re complementary, and all the evidence
now is there that if retailers close a store in a
location, their online sales also go down, and
conversely, if they open a store their online
sales go up’, said one owner.
While the tough market has been an
opportunity to drive down rents, this was really
a signifier of some of the underlying problems,
which owners need to understand. ‘Obviously
when [retailers’] profitability is under pressure,
they’re looking at their rent roll as a very
obvious place to cut costs and improve
profitability’, said one retailer owner. ‘But
fundamentally, we need profitable retailers.’
Affordability is not an issue that can be
universally solved, as retailers are finding out
as they review their portfolios. ‘It’s not just
about retailing when you’re on [London’s]
Oxford Street, or Regent Street, it’s also
marketing at the same time. It helps their
profile. They can probably afford a higher rent
sales ratio in some locations, than they could
in the smaller shopping centres in less relevant
locations across the country. So it’s a balance.’
It is also about aligning with retailers, which
are getting more selective about expansion. It
is no longer about absolute number of stores
but more of a focus on flagship stores and
where the strongest demand is. Affordability
might see more stores in the United Kingdom
close with fewer cuts on the Continent.
The retail revolution has been equally complex
for retailers and getting to an equilibrium to
know what is the right-sized physical portfolio
will take time. Said one owner: ‘A lot of them
are underinvested in digital and they’ve
underinvested in a lot of their legacy portfolios.
Most of these, in particular the fashion
retailers, have oversized store portfolios and
they don’t have a fully functioning online
channel, digital and stores kind of a strategy.’
Adjusting to the digital space is something
that the real estate industry probably
underestimates. ‘The cost of maintaining your
online presence is huge; it’s astronomical.
And I think sometimes that’s a little bit lost on
the real estate industry. There’s certainly no
sympathy towards that’, said one adviser.
What works in the retail real estate owners’
favour is the ‘halo effect’ that physical retail
has on online sales. Research from U.K. data
company CACI found that retailers without a
physical presence experience 50 percent lower
e-commerce sales compared to those with
stores within a certain catchment. Around half
of online spend had ‘touched’ a physical store
whether through consumers trying and then
buying online, or click and collect.15
The difficulty is understanding how that can
be reflected in rents or future partnership
arrangements with retailers. ‘It’s hard to
then say clearly where the point of sale was
committed and how that translates into rent.
I think there’s a lot more coming together of
landlords and retailers, for their mutual benefit
actually’, said one adviser.
The defensive line for owners is to offer
opportunities that marry up the online and
physical side better for the retailer. ‘What
stores enable brands to do is customer
acquisition’, said one owner. ‘I think we’re
going to see a shift where brands and retailers
stop looking at stores as individual profit
centres, but start looking at the total bottom
line of the business and is that store accretive
or decretive to overall group performance.’
Online retail Amazon has opened a series of physical stores. Credit: istockphoto © SEASTOCK
ECE is attempting to bridge the gap between
physical and online retail with its Digital Mall.
This allows customers to search the availability
of products in a local shopping centre, reserve
it and pick it up later on site. It is available in
18 shopping centres with 200 participating
stores and 1.2 million products.
Owners can also help with what is a swing
back to instant gratification for goods as
customers are demanding shorter and shorter
delivery times. Amazon is battling to do last-
mile deliveries, and there has been a rise in the
‘near me’ option for Google searches.
This potentially makes shopping centres
valuable fulfilment centres with owners
needing to think about how this works for
tenants as a collective, even if click and
collect does not drive extra footfall. ‘You just
need to be able to provide convenience for
the customer to access click and collect, in
the most efficient way, from a time-savings
perspective’, said one interviewee.
For all this to work does require alignment of
interest and a stronger relationship between
retailers and owners going forward. Data is
one area which could unite both sides. Better
sharing of turnover information or any relevant
performance data would be a step forward,
although with the mix of online and physical,
this is still not the ideal metric.
Others suggest that newer data could be used
to counter any inadequacy in store location
with digital marketing and social media that
would also help new tenants target consumers.
‘You can literally get the social media profiles
of the customers that are coming to the centre,
what the commonalities are of their shopping
journeys, where they’re going, where they’re
not going.’
All in all, sharing these data could be mutually
beneficial and help retailers and owners be
more supportive of each other. ‘You work
together to try and do the one fundamental
thing, which is to try and maximise your sales’,
said one interviewee. However, for another
interviewee, this was back to the traditional
relationship of balance of power. ‘All of a
sudden, you own one of the greatest shopping
centres and there’s only one store left. Two
retailers want it and you say: “Look, I’ll tell
you what. I’ll give it to the one who also does
some kind of deal with me on their click and
collect.”’
18
Repurposing strategies
As the investment market tries to dislodge
its blockages, owners are also turning to
repurposing strategies to breathe new life into
fading retail schemes and leverage the value
of the land.
The scale of space that needs to be
repurposed is daunting – one interviewee put
it at up to 30 percent of all space in the United
Kingdom, and another interviewee suggested
the same level for France. This underscores
the level of structural change needed and
some of the consequences around value and
returns as the sector is recalibrated.
On one hand, repurposing is a positive
opportunity to attune space to changing
consumer needs. It lends itself to ensuring
places are more mixed use, and reinforces
the importance of interweaving community
uses alongside commercial for more authentic
places. ‘The opportunity is actually great.
You’ve got a real chance now to go into town
centres and turn these things into what town
centres are meant to be, which is thriving hubs
of mixed use rather than just a homogenous
lump of tedium’, said one interviewee.
Bringing in different uses is a trend that
is playing right across Europe, such as
in Germany, where shopping centres are
increasing the percentage of food compared
to fashion. ‘You see interesting changes in
the proportion of what the tenants are and
what they represent. You now have things like
co-working offices in shopping centres. I think
people are starting to be more flexible and
looking at how to reposition space’, said one
retailer owner.
It is an opportunity to address the need for
more housing and the growing need for
logistics space to address the flip side of the
e-commerce impact. It also meets investment
capital’s interest in non-traditional sectors such
as housing and mixed use.
19 | Reshaping retail
On the other hand, repurposing has not arisen
by choice, and the right solutions are not yet
clear. Any move at this stage is defensive
and can only focus on containing future retail
losses by locking in values by changing the
use; however, even then this will stabilise
assets at lower rents.
The upside potential is limited while the risks
to operating income continue to be significant.
There is no way to calculate the difference in
impact on the valuation between doing nothing
and taking action. ‘Certainly, for shopping
centre owners, is now the time to be throwing
more money at repurposing something when
you’re not sure how it’s going to work out?’,
asked one interviewee.
There definitely is very little appetite for the
lost causes, where there is no apparent
solution. ‘I know of one [centre where] the
value is not in the building at all. The building
is actually a burden because you literally
couldn’t repurpose it. It’s not attractive enough
to keep the facade and do anything’, said one
interviewee. ‘I think the value will be in the land
more than the actual units.’
These are lost causes that just have poor
fundamentals whether that is their catchment,
configuration, or competition. They are
expected to simply close or be repurposed
once the valuation has dropped significantly.
For others, it’s about simple oversupply and
accepting that ‘you don’t need fashion retailers
in every single micro-town in the U.K.’
Each country is expected to have failures
even with different shopping dynamics.
The Continent just has the advantage of an
earlier warning. Said one adviser: ‘There are
stacks of assets that aren’t performing that
are going to die, and that is because of the
same disruptions as we’re facing in the U.K.
No doubt about it, but we can see it now as
opposed to it being too late.’
The reality is that any repurposing requires
accepting a lower future income and potential
overall value. Any use other than retail will
offer lower rents so radical changes will be a
last resort. ‘Basically, you’re saying that you
want to turn a gallery of 8,000 square metres
– which is a standard size for 50 odd shops –
into 3,000 of logistics and 5,000 of shop. The
logistics will be at €50 or something and not
€400. I mean if it’s a simple choice between
survival and non-survival, then that’s what’s
going to happen’, said one fund manager.
Funders have mixed views on repurposing. In
general, interviewees said although banks are
sworn off retail, they are open to other ideas.
‘There is capital, but I think you’ve got to sell
the funders the whole picture. You’ve got to
give them a lot of detail to get them on board,
to get them comfortable’, said one.
They are not won over by any opportunity that
just comes from a cheap distressed asset.
‘It’s about the quality of the sponsor and the
business plan. You can’t just say it’s cheap.
You’ve got to have a clear understanding.’
Other lenders think this all needs consideration
for the longer term. ‘You might think everything
looks great here for the term of my loan. But
then, of course, you’ve got to think about the
next person who’s going to take it on, and how
are they going to get you out.’
Case study:
UP! Berlin, Germany
Department stores have been one of the main
casualties of e-commerce, and while the luxury
end of this format has been more resilient,
many traditional department stores are ripe for
repurposing.
In Germany, developer SIGNA is redeveloping
one such failed department store in Berlin
into a 130-metre high-rise office and retail
building. The UP! project on Koppenstrasse will
replace the Galeria Kaufhof store that closed
in 2017.
While Kaufhof was no longer a modern building
or fit-for-purpose, SIGNA saw its potential
because of a pressing need for local amenities
and office space in the area, due to its
dominant residential use and the rising trend of
mixed-use quarters.
More than 2 million people live within a
20-minute commute from the property,
which is in the fashionable location of Berlin
Friedrichshain, and the population density in
Banks also want to see a track record, which
raises the question of who should be doing
the repurposing. It was clear that this was in
shorter supply than the equity. ‘The future will
definitely favour the expertise’, said one. ‘I
know that we’re still on the journey, but I think
those fewer, bigger, better operators will prevail
because, ultimately, the equity is going to need
expertise.’
Others think that working with developers
rather than investors will be one answer.
‘Developers see opportunity, where investors
probably see obstacles’, said one investor.
‘We’re seeing some really successful
How the converted department store will look as the UP! building. Credit: Jasper Architects.
the immediate vicinity, at 11,500 inhabitants
per square kilometre, is well above the Berlin
average of 3,800.
The repurposing was also supported by the
cultural institutions and busy restaurant
scene in the district, which has attracted a
younger, more creative generation to the area.
This influenced SIGNA to add both retail and
gastronomy uses to the project.
developers coming in and really finding some
pretty rather cool, quick, but larger-scale
solutions, and getting on, moving proactively,
building great teams around them.’
Residential is a popular choice for repurposing
to match the growing need for more housing
supply, particularly for those retail assets with
additional land. ‘We’ve got a lot of retail parks
where there are big car parks, lots of extra
space, and we’re looking at doing residential
on there. That’s just intensification of land we
already own’, said one property company.
The 55,000-square-metre scheme will still
retain around 1,900 square metres of retail
space, but the majority will be loft-style office
space, of which 42,500-square-metres have
been let to European electronics commerce
company Zalando. There are also plans for a
co-working space, events, and day-care.
This is also the public strategy of some U.K.
REITs, which are densifying existing sites with
residential and other uses including hotels.
There is slightly more scepticism about the
possibilities of residential as part of existing
schemes. While retail and residential should
be a good marriage, some question the long-
term attractiveness of the proposition. ‘If you
go down the route of just selling off your air
rights to stack’em high, sell’em cheap to resi
developers, you may get a little bit of capital
back, but [with the lack of control] you’re
probably not doing anyone any benefits in the
long term’, said one fund manager.
20
Case study:

Vicar Lane, Chesterfield, U.K.
While Chesterfield, a large market town in
north England, would be considered a relatively
small destination, the improvements to its high
street shopping centre demonstrates how to
successfully build on the local experience to
bring vibrancy back to a town centre.
Fund manager Alteris bought Vicar Lane out of
administration in 2019. It has since improved
the area with by installing a large LED screen
and introducing wi-fi throughout.
Alteris’ aim is to create a centre that can be a
symbolic asset for the town, which it believes
will come through a selection of local services
and assets. It is offering a flexible approach
to its vacant space with opportunities ranging
from leasing retail spaces through to pop-up, a
community hub space and retail merchandise
units. It is also encouraging the participation
of local makers, community groups and small
enterprises.
While retail stores are an imperative part of
a high street, Alteris believes in creating a
personalised town centre in order to reinstate
a successful shopping district. This strategy is
approached through the use of market-leading
technology and physical services.
Alteris says it wants to ensure that physical
assets remain the focus of commerce,
believing that digital methods alone will not
fully encourage consumers to return to their
high streets.
Regular events are a big part of this, which
can be used to create an organic cycle of local
and relevant experiences. These events range
from smaller scope projects such as Christmas
wreath workshops to more substantial
celebrations similar to Chesterfield’s dog day.
There are also many collaborations amongst
local educational institutions, artists and
businesses.
Car festival in Vicar Lane. Credit: Alteris.

Others cite the physical limitations of older
buildings, which make repurposing too
expensive or the mix of shopping centres
adjacent to residential causing operational
issues around noise, smells, security and
deliveries.
Interest in housing has also spurred on
investment in retail warehousing, which is one
of the more active parts of the retail investment
market. Investors like its defensive profile but
also because there is already an immediate
alternative use. ‘Actually, it’s great residential
land, so you could probably buy it, clip the
cash flow while you get your permit and then
destroy it and build the resi and make some
money.’
With logistics as a hot investment trend, this
is also a big theme for repurposing. One
fund manager said: ‘We’re seeing people like
Amazon, for instance, just buying up land,
sites, car parks, anything they can get their
hands on, which they think they will ultimately
use for either drop-off points, or storage
points, or that sort of thing. To achieve delivery
within a certain timescale is going to drive the
logistics market into having mini-logistics in
urban areas.’
With its out-of-town shopping centre network,
some think that industry has a ready-made
logistics footprint. ‘The way that the industry
has grown its centres is to have them at the
junction of the ring road and the motorway.
That’s great news if you’re a logistics operator’,
said one interviewee.
However, repurposing that has already taken
place is more likely to be retail warehousing
in urban locations than related to existing
out-of-town shopping centres, which have not
yet seen the pricing low enough to justify the
conversion into logistics and subsequent loss
of value.
With investors’ enthusiasm for the sector, it
is almost getting ahead of itself, according to
one interviewee. ‘We are developing big-box
retail assets at the moment to more grocery,
discount retail purposes, and we know that
some of the international investors are actually
hoping that you would already design these so
they could [be] converted into logistics.’
This is also an area where the future strategy
is not clear. Although demand for delivery
is growing, there is no clear understanding
of when that will be saturated. With climate
change climbing up the agenda, there will also
potentially be much more resistance to further
expansion to enable a reduction in traffic.
 

21 | Reshaping retail
A view from the United States
With retail sales up 6.7 percent in 2019,
consumer confidence in the United States
has provided a meaningful boost to the
retail real estate sector, as it continues to
restructure.15
The positive sentiment comes as consumers
finally shake off the lows of the global
financial crisis, and also find themselves
with less debt and more money to spend.
However, there is also good reason to
believe that this upbeat news reflects the
industry turning a corner on providing
consumers with what they want.
A shake-out of the retailers in the past
five years has left the market with more
better brands, according to one adviser.
‘It’s my belief that these concepts that went
bankrupt were not providing a merchandise
to the market that people wanted to buy’,
they said.
Instead, there are more concepts that are
generating strong sales and are able to pay
more rent. ‘Despite public perception that
e-commerce has crippled sales, that’s not
a reality. Tenants that are doing well can
continue to pay more rent than they have
historically been able to pay’, said another
adviser.
More retail stores are now opening than
closing, with entrants into the market in
2020 likely to be online-only retailers that
recognise the value of the physical store as
well as lots of new concepts around health
and well-being.16
Further rental growth is expected this year,
helped by very little new retail supply;
the market is developing less than one
quarter of what came onto the market
annually before 2008. This has given
owners the room and confidence to reinvent
their projects without the spectre of new
competition. Top markets for rental growth in
2020 include Atlanta, Fort Worth, West Palm
Beach and Portland.17
Repurposing has also shifted a gear and is
one of the strongest trends in the U.S. market
currently, helped by the better economy.
Providing multi-family housing is a popular
change of use, as is densification of sites by
building on surface car parking, as well as
malls being used for logistics but all with one
overall trend in mind. ‘Whether it’s a mall,
community centre, or power centre [retail
park], we’re always looking at more of a
mixed-use environment’, said one adviser.
Interviewees thought the market was starting
to adapt to how mixed-use would recalibrate
the rental income and value of projects. ‘I
think what the market is feeling is value in
diversifying the exposure to different asset
types’, said one adviser. However, they added
that investors still needed to get better
educated to evaluate mixed-use as the whole
rather than sum of the different uses. ‘It’s
puzzle pieces as opposed to cohesively run’,
said another.
Despite the positivity, the underlying
investment market is still flat. ‘There’s a lot
of hesitation around the mall space and a
bifurcation between what’s considered the
haves and the have nots. It’s the trophy assets
versus anything else, and the pricing will vary
Power centres have suffered from negative sentiment in the investment market. Credit istockphoto © leezsnow
really dramatically between them’, said one
adviser.
Institutional owners and REITs have pulled
back on retail, selectively considering
gateway markets such as New York and San
Francisco where prices remain higher.
Trading of malls – with a view to much-
needed repurposing – has been held back
by department stores which own their units,
or have set out strict rules governing what
mall owners can do in the centres. Power
centres have also seen yields move out
with concerns over filling units that become
vacant, although this is seen to be driven by
sentiment rather than fundamentals.
The greatest change has been in the size
of assets selling, as private buyers ranging
from core to opportunistic now lead the
market looking for lot prices of $50 million
or under.
These private buyers are seen as more risk
tolerant, and benefiting from well-priced
debt and less competition for assets.
However, as their capacity is lower, larger
projects are starting to be broken up and
sold off to cater for them, particularly
stand-alone units such as restaurants or
pharmacies on shopping centre sites or
power centres.
22
4 Looking ahead
Shopping will survive as a necessity and a
pastime, but in what shape will this leave retail
real estate as an investment sector?
With all sectors on the road to becoming more
operational, the answer is wider than retail.
‘Is a world of allocations even going to be
valid anymore?’, asked one interviewee. ‘You
know, use class orders and each asset neatly
packaged into a typology. I neither think that’s
particularly healthy for places, nor is it going to
be that appropriate for, not just retail, but most
asset classes going forward.’
Instead, institutions need to think about retail
creating a rolling diversified income stream
that moves away from long leases. ‘If you see
the amount of money out there for build-to-
rent income, there’s no covenant there, it is
just diversified income streams, which people
are really attracted by. You’re just talking about
a slightly more complex, grown-up version of
that’, said one fund manager.
The sector should also not be afraid to move
towards shorter leases. ‘The corollary effect is
that the capital providers have to understand
that’s okay’, said one interviewee, with banks
needing to offer the same competitive rates to
the U.K. in the future as they would do for a
loan in France with short-term leases.
23 | Reshaping retail
Others think how retail income is valued needs
to change. For some, this would be to move
from comparing assets to actually a better
understanding of how the asset operates.
One way to achieve this could be to price
retail income like that of a company, as a
multiple of the bottom line. This could help
surmount the issue of dealing with varied
covenant strengths. One fund manager said: ‘It
makes far more intuitive sense to me to start
valuing what the asset performance is and the
covenant becomes a nice to have. Ultimately
you know that if the operator goes bust, it’s
interchangeable and you’ve got a good enough
performing asset that’s agnostic as to who’s
running it.’
Larger assets will still be sought after as part
of a diversified portfolio. ‘If you are going to
buy only office and you want big deals, you
have to stay in the capital cities of the world.
But with retail you can be in a secondary
city but have a £300 million asset’, said one
investor. ‘If you want to be diversified and want
to put money out the door, and [institutions] all
have demand to invest money, then I still think
retail makes up a big part of their portfolio.’
Retail specialists are still expected to exist,
but ‘they’ll just have to be fluent in other uses
beyond retail.’ In general, the hope is that
there will be closer collaboration uniting those
owning and managing the asset with the
retailers. ‘I think you’ll expect higher returns
because there will be only greater partnership
model. But the comfort in that is that you’ll
have infinitely better understanding of how your
asset is actually performing. It will effectively
move to more of an operating model than just
standard rent setting’, said one fund manager.
The more operational nature of retail with
additional asset management and capital
expenditure does foretell lower return
expectations, but honing down to prime will be
good for those owners. ‘Space becomes that
much more profitable because it’s in the best
locations. Retailers will always perform there,
and therefore that becomes really quite an
attractive investment’, said one adviser.
For all the flux, the expectation is also of a
more resilient investment product in a right-
sized market. ‘What I don’t know is in the
meantime how we get there’, they added.
References

1
‘Retail: Europe – How cities overtook countries’, IPE Real Estate (September/October 2016). Available at https://realassets.ipe.com/real-estate/sectors/
retail/retail-europe-how-cities-overtook-countries/10015287.article.
2
‘Market in minutes: European retail investment’, Savills (27 November 2019). Available at https://www.savills.co.uk./research_
articles/229130/293083-0.
3
‘Pioneers push out from Western Europe’, EuroProperty (November 2002), p. 44.
4
‘European shopping centres: the development story’, Cushman & Wakefield (10 May 2019). Available at www.cushmanwakefield.co.uk./en-gb/research-
and-insight/2019/european-shopping-centre-development-report.
5
’50 haunting photos of abandoned shopping centre malls across America’, Business Insider (8 November 2019). Available at https://www.
businessinsider.com/american-retail-apocalypse-in-photos-2018-1?r=US&IR=T.
6
‘Store closings: Who are the biggest victims of the retail apocalypse’, USA Today. Available at https://eu.usatoday.com/story/money/2019/12/17/store-
closings-who-biggest-victims-retail-apocalypse/2635535001/.
7
‘Retailers call for action as high street store closures soar’, The Guardian (11 September 2019). Available at https://www.theguardian.com/
business/2019/sep/11/retailers-call-for-action-as-high-street-store-closures-soar.
8
‘Next accelerates store openings after rents cuts’, Financial Times (19 September 2019). Available at https://www.ft.com/content/a76c82ec-daf2-11e9-
8f9b-77216ebe1f17.
9
Ibid.
‘Primark seeks steep rent cuts from landlords’, Financial Times (28 July 2019). Available at https://www.ft.com/content/7ee8c2c6-b136-11e9-8cb2-
10

799a3a8cf37b.
11
‘UK retail industry suffered worst year on record in 2019’, The Guardian (9 January 2020). Available at https://www.theguardian.com/business/2020/
jan/09/UK-retailers-suffer-worst-year-record-job-cuts-store-closures.
12
‘Private equity firms start to lose control of big shopping centre assets’, Bisnow (20 March 2019). Available at https://www.bisnow.com/london/news/
retail/private-equity-firms-start-to-lose-control-of-big-shopping-centre-assets-98080.
13
‘Surprise, les centres commerciaux regagnent des visiteurs’, Les Echos (12 January 2020). Available at https://www.lesechos.fr/industrie-services/
conso-distribution/surprise-les-centres-commerciaux-regagnent-des-visiteurs-1162284
14
‘Data: Physical stores “halo effect” boosts online sales’, Retail Week (12 July 2019). Available at https://www.retail-week.com/data/data-physical-
stores-halo-effect-boosts-online-sales/7032402.article?authent=1.
15
‘NRF says 2019 holiday sales were up 4.1 percent’, National Retail Federation (16 January 2020). Available at https://nrf.com/media-center/press-
releases/nrf-says-2019-holiday-sales-were-41-percent.
16
CBRE (2019) 2020 Real Estate Market Outlook. Available at https://www.cbre.us/research-and-reports/2020-US-Real-Estate-Market-Outlook-Retail.
17
Ibid

24
Urban Land Institute United Kingdom
131 Finsbury Pavement Tel: +44 (0)20 7487 9570
London Email: uk@uli.org
EC2A 1NT Web: www.uk.uli.org
United Kingdom