When it comes to retail property, M&G Real Estate is a giant with more than £8bn of UK assets which encompass some of the country’s best-known shopping centres. But, as we found out from its Head of Retail, John Duxbury, it’s also committed to help shape the future of our town centres.
For decades, M&G Real Estate, and in its previous incarnation as PRUPIM, has been one of the major investors in and creators of the UK shopping space. Today, its £8bn+ holdings encompass 13 shopping centres, 54 retail parks and 146 High Street assets. It owns, or has a share in, many of our most iconic stand-alone shopping centres including Bluewater, Cribbs Causeway and Manchester Arndale. It is a giant but – like Roald Dahl’s BFG – is an approachable one which is committed to more than just the performance of its properties.
The man who oversees the direction of M&G Real Estate’s retail holdings, John Duxbury, embodies this commitment to a wider vision. He sits on the Government’s High Street Restructuring Working Group as well as the steering group for the British Property Federation’s (BPF) Town Centre Investment Zones initiative, which reported earlier this year with recommendations on how to address the problems of our town centres.
Duxbury is passionate about getting town centres to work and points out that, despite the headlines around the troubles of the UK High Street, many are performing well: “Many town centres are doing fantastically well: notably the ‘cathedral towns’ – the ones a notch down from the big regional centres.
“The big metropolitan centres, Manchester, Leeds, Birmingham, Bristol, they’re all in a good place; but some of the towns that are further down the hierarchy have got challenges facing them, notably those that have a much smaller catchment where there is less demand or those that have developed too much space.”
M&G Real Estate’s holdings are very much a top slice of UK retail property and, as such, are showing a vacancy rate of under 3% – in stark contrast to the double-digit levels that prevail in many town centres. However, even though it sits in an enviable position, M&G Real Estate’s broader perspective on UK property also feeds into its vision of how UK town centres can progress.
Duxbury observes: “The investor’s perspective, in its simplest terms, sees an oversupply of UK retail and this imbalance continues to undermine the sector’s performance with significant downside risk in weaker secondary retail locations.”
He believes that enhancements to the provision of new office and residential space in town centres can only help the dynamism of shopping space.
“There are various factors going to influence this. For example, a number of years ago, out-of-town business parks were the flavour for employment choice. But you now see office schemes in many city centres.
“That will support retailing and encourage the development of in-town residential. As part of that, weaker retail spaces that sit on the periphery of town centres should be re-purposed, which will increase supply tension in a town’s core retail zone and as a result drive rental growth and encourage investment. Development is going to play a big part in achieving this and rebalancing our town centres.
“Some peripheral retailing areas, what we recognise as weaker secondary and tertiary areas, should be re‑purposed for housing opportunities. The Government is very keen on starter homes and there’s a big private renting sector developing in the UK.
“There’s a great opportunity to recycle weaker commercial areas for a mix of private, rented, starter homes, retirement homes, community facilities and even light industrial space that is complementary to what a town centre needs.
“We’re seeing the green shoots of real structural change in town centres. It’s a long-term change; and it’s a great opportunity, but will require a positive collaboration between investors and local authorities, facilitated by Government.”
In Roald Dahl’s Big Friendly Giant, the eponymous character points out that ‘two rights don’t equal a left’, and it’s an aphorism that neatly encapsulates the tension which has historically existed between landlords and local authorities as they have strived to achieve their own objectives.
To address this situation, Duxbury is part of a growing lobby which believes there needs to be co-ordination and consultation between interested parties, but also that a more formal structure for taking town centres forward should be looked at.
There’s no silver bullet for the town centres; they need a host of different initiatives
and my personal view on it is that it does need Government support, fiscal intervention, long-term planning and investment that can rely on stable and consistent policy making.
“The BPF position on this is the creation of town centre investment zones: essentially putting a red line around your core town centre and introducing a form of town centre investment management piece where you are trying to align interests, combine ownerships and, potentially through an investment bank, create a fiscal carrot to encourage the right behaviours among the interested parties. This would allow the ‘zone’ to apply the asset management techniques that we deploy in shopping centres and retail parks, using active management to optimise occupier adjacencies to drive footfall, dwell time, sales turnover and provide a great customer experience.
“The key issues are control and the alignment of stakeholder interests in town centres, which are usually characterised by multiple, fragmented ownerships held by investors with different investment agendas.”
In the context of making town centres more attractive to retailers, landlords have come under fire for not providing lease flexibility or being prepared to share the risk. However, Duxbury thinks that the market has already largely achieved an equable balance of interests.
“I see the lease length debate as a bit of a sideshow. The market has already adjusted: the average lease length in retail is under 10 years and probably won’t reduce massively from that level because most leases have break options and you have got many retailers who sign up for a 10-year term in order to write-off fit-out costs over that period. They have got good balance sheet reasons to do it.
“I don’t think that’s the crux of the landlord-retailer relationship. The more challenging areas in retail are around further store consolidation and the supply of new entrants into the market. There are some retailers who, during recent years, have found it quite difficult to trade in the town centre environment. Some of them prefer to trade out-of-town; they find the retailing format more efficient and cost-effective. Retailers like the adjacencies and customers like the ease of access and car parking, all of which helps facilitate click and collect.”
M&G Real Estate remains an active investor in the retail sector, completing over £300m of acquisitions in 2015. Out-of-town, its biggest purchase last year was the McArthurGlen Bridgend Designer Outlet Centre, which it bought from TH Real Estate for £115.5m. Another notable acquisition was the 178,145 sq ft Ayr Central Shopping Centre in Ayr town centre.
“Retail is part of our universal social structure and, accordingly, remains a key element of our investment DNA. As polarisation gains further momentum and consumers shop less frequently in fewer locations, our investment strategies are adapting. We’re seeking out the larger regional centres, dominant prime town centre assets and shopping parks. Astute stock picking and active management by sector experts is key.”
Whilst a lot of its activity centres on buying existing investments for its various funds, M&G Real Estate is also a developer and is now progressing several schemes.
“As an investor, we will develop directly or fund development to secure the right product to hold longer term. We’re also actively refurbishing some units and parks,” Duxbury reports.
“In Guildford, where we own The Friary Centre, we are working with the council to bring forward a mixed-use scheme that is integrated into the town centre and, in Bristol, we are working up plans to extend The Mall at Cribbs Causeway. We have capital to deploy and like development opportunities in strong locations.”
Streamlining the development process is something that he believes can play a pivotal role in the rejuvenation of town centres.
“The environment needs to be made more development-friendly I suppose in some of the town centres. It’s recognising that some of the peripheral areas need to be packaged and recycled for alternative uses.
“We need to look at what undermines progressive development when we should be encouraging it.
” Despite the uncertainty brought by issues such as a possible Brexit, Duxbury thinks we should see the market in a broader, long-term context.
UK households have not really had it better in a decade:
very low interest rates, deflation across some non-discretionary cost items, wage growth coming through, consumer confidence and plenty of household spending power. We are seeing rental growth in an increasing number of locations so it’s not just about letting shops, but increasingly more about looking to get vacant possession of certain units in order to re-let them with advantage.
“We recognise the challenges but also see the great opportunities to reposition town centres, delivering both housing and employment initiatives.”