Flat-pack furniture giant Ikea decided to close the doors of its north London megastore last week, in a bid to keep up with “changing shopping behaviours” as almost half of Ikea’s sales are now made online.
But rather than adding to the doom and gloom surrounding bricks-and-mortar retail, the Swedish homewares chain is shifting its focus to prime London retailing grounds. Ikea will open a shop in Oxford Circus over the summer, and has further plans to invest £1bn in the city over the next three years.
Richard Lim, chief executive of Retail Economics, told Investors’ Chronicle that Ikea’s move upmarket reflected a growing trend towards stores being used as showrooms. Online athleisure brand Gymshark has also set its sights on London’s prime shopping streets, planning to open its first ever shop on Regent Street this summer, with a potential London listing also rumoured to be in the works. Retailers are starting to see property “more as a marketing expense” rather than “necessarily making a profit”, said Lim, adding that “it is becoming increasingly blurred, what the value of a store actually is”.
Retailers have indeed witnessed a ‘halo effect’ with higher online sales in areas where a new store has opened, suggesting that customers still like to see products in-person before making a decision to buy virtually.
Pre-pandemic research from business consultancy CACI found that retailers that did not have a physical store in a particular area experienced 50 per cent lower online sales compared to those that did. Nevertheless, for this trend to rescue retail property would be quite the turnaround, with PwC finding that 47 shops across Great Britain closed for good every day in 2021, resulting in around 10,000 net closures in the year.
Ikea itself is often a cornerstone of development plans, so any further shift away from large outlets will be a worry for property owners. This shift was recently underlined by the opening of Livat, formerly known as the Kings Mall in Hammersmith and which was bought in 2020 by Ingka Centres, a division of the holding company which controls most of Ikea’s store network. It has since gone on to acquire other retail locations in affluent central urban districts – including the 6x6 in San Francisco and the Aura Retail Podium in Toronto – with a plan to redevelop the sites with Ikea as an anchor tenant.
The Hammersmith site was sold by Schroder Real Estate Fund for £131mn, or a 20 per cent premium to its book value, meaning the open-ended fund booked an 8.5 per cent annualised total return over its five years of ownership.
The experience of most other shopping centre owners during that period was far less happy.
Intu, the former owner of Lakeside in Essex, saw its shares suspended in June 2020 after it collapsed into administration under a weight of debts and falling asset values. Hammerson (HMSO) – a major owner of retail developments which now brands itself an owner-operator of “sustainable prime urban real estate” – has so far avoided Intu’s fate, but has lost 90 per cent of its market value since 2015.
The Kings Mall transformation will be closely watched by retail landlords searching for ways to revitalise tired shopping centres with high vacancy rates, weak footfall, and struggling tenant bases. Among them will be NewRiver Reit (NRR), whose exposure to unwanted retail assets saw its net asset value drop from 292p to 131p per share between March 2018 and September 2021. The group has recently reported a renaissance for local retail parks thanks in part to a growth in homeworking.
Others already have strategies to reinvent shopping. In December, Land Securities (LAND) described its purchase of a 25 per cent stake in Bluewater, an out-of-town mall in Kent, as a sign of its “commitment to major retail destinations that offer something that can’t easily be replicated online”. Its rival British Land (BLND), meanwhile, is pressing ahead with plans to partially convert some urban retail centres into logistics hubs for online shopping and same-day grocery deliveries.
