While lockdown may have pushed some retailers over the edge, Covid-19 has merely accelerated the existing decline in footfall to the UK’s high streets and a slide in asset valuations. Retail property owners are grasping for a solution. For some, residential development is part of the answer.
In a letter to its 80,000 staff or 'partners', beleaguered department store chain John Lewis has said that it is exploring potentially repurposing excess parts of its land and store estate into mixed-use private-rented affordable housing, in conjunction with third-parties. Chair Sharon White, who had already warned that hundreds of jobs would be cut and eight stores shut, said that to be sustainable the partnership would need to “expand beyond retail”.
It follows the announcement of a package of post-pandemic stimulus measures aimed at making it easier to convert retail space into housing, in what the prime minister claimed would be the most radical reforms to the UK planning system since the Second World War. The changes, which are due to come into effect in September, would mean that builders will no longer need a normal planning application to demolish and rebuild vacant and redundant residential and commercial buildings if they are rebuilt as homes.
Given the government is still a considerable way off achieving its goal of building 300,000 new homes a year by the mid-2020s, converting empty shops into housing would seem to make sense. But even though demand for housing exists, the practicalities of changing use may not stack up for all retail property owners.
Even taking planning issues out of the equation, there are configuration challenges to converting retail space that can lead to hidden costs. For instance, redeveloping a series of shops scattered about a town centre is a lot more difficult than a cluster of units. What if some of the sites are still occupied? A landlord might have to buy tenants out of their leases in order to complete the project.
Then there are valuation issues. “Even an empty shop that is falling down probably has got more value and is worth more as a shop than it is a house,” according to Knight Frank’s head of retail research, Stephen Springham. He estimates that, as a rule of thumb, a value of £400 per square foot (sq ft) is the tipping point to make converting retail into residential worthwhile. Retail values are typically still above this point and would need to fall further, he argues.
Meanwhile, the average price attached to a UK home was £260 per sq ft during the second quarter, according to data from Zoopla. That said, the pace at which retail asset values are continuing to fall will probably mean that the valuation gap narrows pretty quickly and, given the pressures facing retailers, leasing to residents could become increasingly attractive to landlords with fewer reliable income prospects too.
