Shape shifting

John Lewis recently created headlines when it announced it was moving into the residential market, and with so much excess space in the market, this is likely to be a strategy other retailers will follow.

We investigate the key benefits of this approach, who is best placed to capitalise on it, and where we see the greatest opportunities.

There are three main approaches to shifting retail property into residential:

Retailer-led
John Lewis's plans include building 10,000 new homes over the next few years. The build to rent scheme will primarily make use of its existing property portfolio, using excess space including car parks and the space above stores. John Lewis is uniquely placed to implement this based on three factors: the scale of excess property in their portfolio, their experience renting property at partnership owned members clubs, and their ability to furnish the properties with goods from their range.

The diversification of JLP's property portfolio is a key benefit of this strategy. It aims to secure long-term income for the company while de-risking their investments away from a solely retail-focused proposition. Secondary benefits to this strategy include developing their market presence and reputation for quality, showcasing their homeware offer and developing local markets for Waitrose branches which are expected to anchor several of the developments.

Amongst the three methods we have identified for moving from retail to residential, this appears to be the highest risk. While JLP have some experience in the property management industry, new skills will be required to develop on the scale that they have indicated. However, if done right it offers a compelling opportunity for brands to diversify and develop additional revenue streams.

Developer-led
Hammerson have announced plans to develop 338 residential units on the site of the former Debenhams unit at Highcross Shopping Centre, Leicester. The announcement came with a commitment from MD Mark Bourgeois to "invest in the city centre to ensure it is resilient to the structural shift in retail and consumer shopping habits". In contrast to JLP who appear to be leading the development of residential space in-house, Hammerson are collaborating with the private rented sector specialist, Packaged Living. The development promises to include new public realm, ground floor retail and a roof terrace as part of the residential offer.

These flats are expected to appeal to graduates, couples and young executives looking for easy city living. By bringing people back into city centres, this will create an in-built market, benefitting the remaining retail element of Hammerson’s asset. If successful, there is significant scope for this strategy to be extended to other assets.

This method is best suited to retail space in city centre locations. The appeal of city centre living will drive demand for these apartments, where residents may be willing to sacrifice space and parking facilities. Assets in secondary and local towns are unlikely to have the same demand, however, that doesn't make this option unfeasible. The success of developing shopping centre space pivots on curating a suitable environment, with the relevant facilities for the correct target market.

Collaborations
Retailers (particularly grocery retailers) are collaborating with property development companies to anchor residential developments, enabling access to a built-in catchment. Recently, retailers and residential developers in the UK have formed a symbiotic relationship. Developers looking to build residential units are more likely to receive planning permission for a mixed-use building. This has opened an avenue for retailers to either develop above existing stores or join a development in the early stages, guaranteeing a built-in catchment.

This is not a new strategy amongst developers in continental Europe, who have utilised the space above supermarkets for several years and retailers such as Lidl and Aldi are at the forefront of this strategy in the UK. The key benefit of this strategy as a retailer is the limited exposure to financial risk, as the development of residential units is outsourced. However, as these residential units are built to sell (which contrasts with retailer led and asset manager led strategies) there is no potential for long-term income from a diversified revenue stream.

This method of retailers shifting to residential is the most passive, relying on the developers to drive the project forwards. As a result, it is the lowest risk approach. However, there are a limited number of operators that would be able to succeed in a standalone unit, which primarily restricts this strategy to grocery retailers. There may be opportunities for developments in the future to be anchored by restaurants, leisure operators or a syndicate of smaller retail occupiers.

Conclusion
In the UK, we expect the trend for retailers considering residential developments will continue to grow, primarily driven by the requirements of the housing shortage and the re-evaluation of excess retail space. Diversifying revenue streams, disposing of excess space and creating local markets are significant benefits of this shift, though retailers must decide on their required exposure to risk, understanding that those who risk the most, may have the most to gain.

If you would like to find out more about our work supporting investors and operators in mixed-use, travel and retail property, simply reply to this email or click here. 

Tish Hewitt