Brick by brick: how retailers are future-proofing their property portfolios

Claire Wilkinson presents the insights offered during a roundtable discussion of industry experts at UKREiiF 2024.

Representing 4.9% of the UK’s economy and generating sales worth £510bn in 2023, a House of Commons research briefing estimates there were 2.7m retail jobs in the UK in 2023.

Despite having such strong roots in the UK economy, the Covid-19 pandemic hit retail hard. Lockdowns prevented consumers from physically browsing the high street, which in turn damaged consumer confidence and accelerated the existing digitalisation of shopping habits.

So how can businesses find the right balance between their online and on-street presence? What steps can be made to future-proof their portfolios?

Covid, capital and carbon challenges

Once the economy reopened and consumer confidence started to increase after the pandemic years, it was quickly knocked by global events and the cost-of-living crisis that is continuing to stretch wages.

For retailers, inflation and the rise of interest rates have placed significant pressure on those looking to rebuild and grow in an economy that is placing greater scrutiny over the sustainability of their products, supply chains and property portfolios.

What is more important for a retailer right now? Is it the need to drive sustainability, investing in greener technologies and decarbonising their supply chains? Or would a retailer prefer to secure investor backing to help grow and secure its property portfolio in challenging trading conditions?

Opportunities for new services in new locations

While some investors have been refurbishing and diversifying their retail-heavy portfolios, others are doing the opposite.

These investors have recognised the drive for net zero as an opportunity for innovation and growth. Investors still recognise the importance of physical stores and the opportunities they can offer, particularly when they are a strong fit for the locality, for example when positioned in mixed-use developments or offering services for the NHS.

Leveraging sustainable financing

Other investors point to the new wave of sustainable finance on offer to retailers, with one high street bank targeting $1tn (£791bn) of sustainable and transition financing between 2023 and the end of 2030. Historically, loans were focused on green projects that limited applications for funding, but the rise of social loans and sustainability-linked loans are aiming to remove such restrictions and allow retailers to explore their own ESG journey.

These loans can offer new opportunities to tackle the challenges of sustainability and rebuilding faced by retailers. For example, SLLs allow the cost of sustainability verification and monitoring to be offset by interest rate reductions, with the structure of the loan incentivising the borrower to achieve its sustainability performance objectives. However, while they are an attractive proposition for high-value transactions, they may not work as well for smaller loans. To date, most mainstream sustainable finance products come with substantial verification and monitoring costs, meaning only those with a larger borrowing need are able to offset the cost by the associated interest rate benefits of SLLs.

Without funding that works for small and medium-sized retailers, inevitably their main focus will always be to prioritise the use of available capital to secure their existing portfolios and to protect their business. The recent outrage over “fast fashion” and increasing climate activism highlights that there is no lack of incentive for retailers to become more sustainable, but it is a lack of ability to respond in the current economic climate that is holding them back.

More recently, lenders are seeking to shape sustainable finance products to the ESG ratings many retailers and other businesses use, and one high street bank already has a product that is aimed directly at small and medium-sized businesses. This is particularly welcome given the clear appetite for access to sustainable products, particularly if that also leads to some interest incentives while rates remain high.

Strategies for bricks-and-mortar stores

Retail is transforming with the rise of new pressures, technology and changing shopping habits. With the acceleration of online shopping, is this really the end of the high street? “Far from it,” agreed our panellists at UKREiiF. This view is backed up by the fact eight of the 10 largest UK retailers continue to operate both online and on the high street.

Retailers increasingly view their online and offline operations as interconnected, with one supporting the other. This has created a need to evolve their shops to accommodate the ever-growing online presence while maintaining their offering to the in-person shopper.

For example, as a result of the success of food delivery companies such as Deliveroo and Uber Eats, McDonald’s is seeking to reimagine its restaurants to better integrate digital channels through the allocation of specific delivery pick-up spots, thereby avoiding negative experiences for the in-store customer. Similarly, Westfield Shopping Centre has also introduced new policies to ensure the combination of in-person shoppers and delivery drivers does not create friction.

Omnichannel retailing and e-commerce is a business strategy that aims to provide a seamless shopping experience across all selling channels, including in-store, online and mobile. It is being used by retailers to engage customers through multiple physical and digital touch points. It’s a good way to achieve a heightened level of personalisation, provided the technology is sophisticated enough to ensure customers can transition between online and high street stores without inconsistencies of experience. A success story for this strategy is Starbucks with its reward card and linked app allowing customers to accumulate points, find stores, order ahead of time and even browse their favourite store’s playlist.

Physical stores will always be key to a consumer’s experience and for retailers to secure sales. The main reason consumers prefer shops is the fact they can see, experience and test products, all of which helps to close the sale. Finding the correct balance and strategy will be crucial for retailers to secure their portfolios, and they will also need support from other players in the sector.

Working together to redefine and reinvigorate our high streets

The wider stakeholders need to collaborate with retailers to protect the high street and also their own investments. One panellist remarked that: “An empty unit is a sore sight for both the consumer and the landlord.” So what can stakeholders do to allow retail to thrive and survive?

Shorter-term leases with more frequent break clauses, turnover rents and rent-free periods can work well for landlords to entice retailers back to empty units. They ensure retailers have the stability to thrive but also the “get out” option allowing them to protect their businesses if things don’t go to plan.

Retailers will always value a mindset of “we’re in this together”, and landlords need to be receptive to applications for physical changes to stores that will help future proof trading in the face of a changing retail environment.

While SLLs offer good opportunities for higher-value transactions, sustainable criteria may need to be diluted for leases granted to small and medium-sized retailers by adapting green clauses to reflect the challenges in the local area. After all, most landlords would prefer a “paler green” tenant than no tenant at all.

Legislative uncertainty

Martyn’s Law was not passed before parliament was dissolved ahead of the general election. Otherwise known as the Terrorism (Protection of Premises) Bill, the Bill sought to enhance security and mitigate the risk of future terrorist attacks in public venues. If passed by the new government in its existing form, it will place greater requirements on retailers and landlords to manage their spaces, and retailers of some premises could incur significant additional costs. This could see retailers undertaking a careful review of whether they would be better located in shopping centres or independent stores.

The high street is here to stay

Contrary to the belief that e-commerce will take over, physical retail continues to play a pivotal role in the sector. Retail remains at the heart of communities, and retailers provide many vital services to the customers they serve. Vibrant shopping areas also create a sense of place, which is vital for the health and prosperity of any community. With the right strategies, collaboration between stakeholders and the weaving of online and in-person channels, retailers can thrive.

This article was first published by EG - @EGPropertyNews – on 8 July 2024 (here).