Legacy Portfolio blog

High Street Closures

Why retailers make good property developers but poor disposers of surplus space

I started my “retail life” at the Burton Group, run at the time by the famous “five times a night” Sir Ralph Halpern. I had the good fortune to meet Sir Ralph a few times even though I was very junior in the organisation.  What struck me most was how energetic he was, leaving aside the obvious remark. A colleague of mine once said that the best thing about Sir Ralph was there was no negativity, he only looked forward.

At the time consumer spending was hot, the 1991 recession some way off and the effects of the stock market crash of 1987 receding. There was a “race for space” on the High Street. The Burton Group started expanding its brands, driving Top Shop the hardest. The group went further and started to develop Retail Parks, creating a property subsidiary, Burton PropertyTrust, to lead this charge.  Sir Ralph was ahead of the game by a number of years and at one famous AGM a shareholder said he was “the greatest living Englishman since Winston Churchill”.

However the glow of the period from 1987 to 1989 was driven by unsustainable factors, namely; the abolition of double mortgage interest relief (MIRAS) for dual borrowers on individual residential properties on August 31st 1998 which had the unintended consequence of driving up property prices as ‘couples’ sought to beat the deadline, and the slashing of interest rates by 2.5% after the stock market crash which started to fuel inflation. At one point, inflation in the UK was three times that of Germany. Soon after interest rates rose by 7% in less than 18 months peaking at 14.875% on 6th October 1989.

It all came crashing down with £ exiting from the ERM in October 1992 thus allowing interest rates to come down. By then it was too late, the damage done to the Burton Group was too great, with the higher interest costs crippling the Retail Park developments. There was a huge downsizing, with sites closed on the High Street at considerable cost, Retail Park developments put on ice and two rights issues in The City.

Was Sir Ralph right?  My view is yes and no.

Yes, because retailers are great identifiers of required space. No, because when it comes to disposing of surplus space they are found to be lacking in decision-making and execution.

 Roll on 20 years…

I went to a meeting with an old friend of mine from Selfridges who used to work in retail property.  He was reliably informed that six major retailers had been in discussions with a large retail park and shopping centre developer to set up a joint venture. They would together anchor each site, in order to re-develop and roll out between 10 and 15 developments over the next 10 years. Each development would be pre-funded.

I asked where the initiative had come from and was told it had come from the retailers who had realised that their best performing stores were in a certain location where they were alongside each other. They believed that together they created better footfall and if they were to co-anchor why not take a share of the development profit. What a brilliant idea.

During the discussions of which sites to develop, one common theme came out. Each site would impact the local High Street.  Three of the retailers had an existing High Street presence and three didn’t. It transpired that the reason the discussions were still ongoing after 12 months was that the three retailers with an existing High Street presence could not make a decision about closing their legacy stores.

At Legacy Retail this is something we frequently see and is another example of why retailers make good property developers but poor disposers of surplus space. In this particular example, the enhanced profits from the “cluster” initiative would easily outweigh the cost of closing the surplus stores. Furthermore by closing them before the development starts, the retailer would be able to cash in on an enhanced valuation. It is key that retailers make strong decisions in respect of the disposal of their surplus space and execute them before the opportunity is lost and someone else comes along to fill the gap of managing the surplus High Street sites.

About the author

Barry Knight

Barry Knight

A retail veteran blogging about the latest retail trends.

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