Shopping Centres – The Changing Face

Key Messages

• The income profile of Shopping Centres has changed radically in recent years.

• Income has unsurprisingly rebased considerably (-16.5%).

• More surprising are:

o the timeframe over which this has happened
o changes in the sub-sector mix and
o differences between Regional / Local Shopping Centres.

• Rebasing of income actually more pronounced in the two years prior to COVID (2018/2019) than it was during the two peak years of the pandemic itself (2020/2021).

• Fashion (-22.5%) and Household/General Operators (inc dept stores) (-26.0%) saw the steepest income declines.

• Leisure (+4.9%) has seen its income profile increase over the last four years, but F&B (-21.2%) and Cafes / Coffee Shops (-12.0%) have seen income decline.

• Income rebasing has largely run its course in some sub-sectors, whilst in some (especially Fashion) it is still ongoing.

• Vacancy rates have virtually doubled over the four year period and stood at 16.6% at the end of 2021.

• The income profile between Regional and Local Shopping Centres has diverged over the last four years as both sub-classes have repositioned to remain relevant.

• Income derived from Fashion operators has declined significantly in Local Shopping Centres (2018: 21.8%, 2021: 16.7%) and is likely to be <15% in sustainable assets.

• Conversely, other sub-categories have increased their share of income in Local Shopping Centres (e.g. Essential Retailers, Value Operators, Foodstores),

• Income profile at Regional Shopping Centres more stable over the last four years. Fashion continues to provide the single largest income stream (ca. 38%).

• Leisure increasing share of income at both Regional and Local Shopping Centres as landlords across the board look to diversify and evolve their proposition.

• Shopping Centres caught between the stools of Local Convenience & Regional Destinations face the most challenges in (re-)establishing a sense of purpose / relevance.

• There is no 'one size fits all' blueprint for Shopping Centres - an enduring and successful scheme will always be one that reflects the needs and aspirations of the town and catchment audience it serves.

The rate of income decline actually decelerated rather than accelerated during the pandemic, income from F&B has declined over the four year period, fashion continues to provide the dominant income stream in Regional Shopping Centres despite considerable occupier fall-out and retrenchment. Three of the more surprising findings from our Research.

Overall Shopping Centre income declined considerably over the last four years, vacancy rates virtually doubled and Leisure now commands a larger share of income at both Local and Regional Shopping Centres. Three of the slightly more predictable findings.

Horses for courses. Above all else, the Research paper highlights the extent to which Shopping Centres are evolving not just to survive, but to remain relevant. The income profile is definitely changing and we are able to project what that may look like in the future, particularly as Local Shopping Centres reinforce their convenience credentials and Regional Shopping Centres underline and build on their one-stop destination status.

The premise

The Research has been conducted using anonymised Shopping Centre data from Knight Frank’s Retail Valuation Practice. We have collated all the Shopping Centre occupational data we hold into a single workspace (which we refer to as the ‘KF Valuation Universe’). This ‘Universe’ encompasses ca. 25 individual landlords and ca. 3,800 units, across ca. 60 assets. These range from small local schemes (<10 units) though to major regional shopping malls (>350 units). From the workspace, we have aggregated the following:

- Income by sub-sector / category
- Spread over a four year time horizon (2018 – 2021 inclusive)
- Broken down by Local and Regional Shopping Centres
- Vacancy rates.

Income performance – and by category

Overall Shopping Centre income has rebased significantly over the total timeframe covered (FYs 2018 – 2021). Across all categories, income has declined by -16.5%, perhaps slightly lower than the unsubstantiated ‘rule of thumb’ of between -25% and -30%. Shifts in income over time are largely a reflection of two fundamental moving parts – rebasing of rent and changes in tenant mix.

There are significant variances in income performance by product. As an oversupplied market at the sharpest end of industry-wide structural change, it is unsurprising to see that the income profile from Fashion operators has rebased very significantly (-22.5%), a decline exceeded only by Household/General operators (-26.0%), a classification which includes similarly challenged department stores.

At the other end of the spectrum, Leisure (+4.9%) and Banks/Building Societies (+4.7%) are the only two sub-sectors to have contributed higher income over the four year period. The former is perhaps easier to explain than the latter. As Retail has struggled and vacancy rates have increased, this has opened the door to Leisure operators to take new space. At the same time, landlords are increasingly recognising the holistic benefits of having a more rounded proposition within their Shopping Centres and have been more proactive in seeking out Leisure tenants.

Other surprises? The apparent contradiction between Leisure (+4.9%) and its peer sub-categories Dining (-21.2%) and Cafes / Coffee Shops (-12.0%). While F&B generally is widely perceived to have been one of the key beneficiaries of shifts in tenant mix within Shopping Centres in recent years, this does not totally override wider challenges. While the focus has tended to be on retailers, F&B operators have had more than their fair share of distress in recent years, with a whole host of well-know casual dining brands launching CVAs.

COVID vs pre-COVID

Our Research challenges, nay totally contradicts, the oft-repeated soundbite that “COVID-19 merely accelerated pre-existing trends and brought about 5 years of change in as many months”. As a collective whole, Shopping Centre income declines were more severe prior to COVID (-11.1%) than during the two years of COVID itself (-8.5%).

Whilst it may be easy to blame COVID for much of the malaise in retail and in Shopping Centres specifically, it is easy to forget or under-estimate the scale of the structural challenges the sector faced long before COVID made its unwelcome presence felt. Fundamental rebasing was already in place and much of the ‘heavy lifting’ in the restructuring of retail had already been completed before COVID struck.

The key exception to this general ‘deceleration’ trend is Fashion (2018-19: -11.5%, 2020-21: -16.9%) suggesting a more protracted period of re-basing and right-sizing that, for all intents and purposes, is still ongoing.

Changing income profiles – Regional vs Local

There is a clear divide between Regional and Local Shopping Centres. Shifts in income profiles over the last four years have been telling and highlight the different roles Shopping Centres are fulfilling – and will continue to fulfil in the future. The prominence of Fashion in Local Shopping Centres is slowly diminishing, accounting for just 16.7% of income in 2021 vs 21.8% in 2018. This shift may reflect historic over-expansion on the part of fashion retailers during the ‘boom’ years which saw them acquire space in smaller schemes that has proven unviable in the longer term.

Sub-category “gainers” in Local Shopping Centres include Banks / Building Societies, Essential Retailers and Value Operators. Although the shifts are relatively small over the four year time period, they are indicative of a wider direction of travel – a far greater emphasis on Convenience. This is predominantly the role a successful Local Shopping Centre will fulfil going forward.

In contrast, the income profile of Regional Shopping Centres has been more stable over the last four years. Fashion has seen only minor retrenchment and indeed, this will remain the mainstay of their propositions going forward. Household/Other/General have seen the greatest income erosion (-270bps), largely a reflection of fall-out from department stores. Leisure’s share of income has increased +70bps (as, indeed it has in Local Centres, +120bps), albeit it still is relatively small in the overall income of most Shopping Centres.

In the full Research paper, we extrapolate on these trends and provide our projections of the income profile for sustainable Shopping Centres longer term.

Vacancy rates

Across the ‘KF Valuation Universe’, vacancy rates have virtually doubled over the last four years, whether measured as a percentage of ERV or floorspace. By floorspace (the most traditional measure), the vacancy rate stood at 16.6% at the end of 2021, an increase of +816bps versus 2018.

But, as with income trends, there was no discernible acceleration during the pandemic compared to the pre-COVID period. In fact, the increases in vacancy between 2018-19 (+344bps) and 2020-21 (+340bps) were virtually identical. By extension, COVID did not induce an occupier shake-out, this was firmly in place well before the pandemic struck.

As an average figure, the headline rate (16.6%) masks huge disparities between certain landlords and individual assets. Some have maintained full occupancy (i.e. zero vacancy) over the full four year timeframe. In contrast, outliers at the opposite extreme now have vacancy rates approaching ca. 70%. As a very general observation (without transgressing anonymity parameters), private equity and REIT landlords have tended to keep vacancy rates more in check than some of their institutional counterparts, particularly pension funds. But there are some exceptions.

Conclusions

• Shopping Centres have borne the brunt of structural change within the retail industry. The process of change pre-dated COVID-19 and will be ongoing for many years to come.

• Historic under-investment and lack of effective asset management are two of the root causes of many of the challenges in the Shopping Centre market. Many assets are unfit for purpose and will be reconfigured into alternative uses.

• Those Shopping Centres that do endure will need to (re-)establish a sense of purpose and give consumers a compelling reason to visit. This will vary by location.

• In very broad terms, the ‘raison d’être’ of Regional Shopping Centres will still be destination, one-stop shopping, a full day out experience. Infrequent but big basket shops.

• For Local Centres, the emphasis will be far more convenience-led. Higher frequency lower ticket shopping trips.

• An increase in Leisure exposure (including F&B) is likely to be a common denominator between Regional and Local Centres, although may take on varying guises in different locations.

• The income profile of Shopping Centres will shift considerably to reflect their repositionings. Essential Retailers and Value Operators will account for increasing proportions of income at Local Centres, as the expense of Fashion, which will play a far less prominent role in many smaller schemes.

• Many of the most challenged Shopping Centres are those that fall between the two stools of Regional and Local Centres. Ascertaining a true sense of purpose for many of these schemes is challenging.

• There is no ‘one size fits all’ blueprint for any Shopping Centre. Each is unique and serves a distinct catchment and local market. Ultimately, the most successful schemes will always be those most closely aligned to the needs and aspirations of those that they serve.

Read the interactive report here

Download the PDF version here