Shopping centers and malls will undergo massive change in their use and appearance over the coming years as landlords and retailers adjust to the structural changes in the sector, Matthew Roberts, the CEO of one of the U.K.'s largest owners of prime retail property, said.
Speaking at the 2020 EPRA Insight event on Jan. 7 in London, the Intu Properties PLC boss said consumer demand for experiences meant that shopping centers will be less focused on traditional retailing and more on leisure and food and beverage outlets.
Intu Properties has been one of the worst-hit victims of the turmoil that has ravaged the U.K. retail sector. The rapid growth of e-commerce, sluggish consumer spending growth, and intense competition among retailers has led to a deluge of insolvencies and store closures that have hit rents and left landlords with swathes of empty space. Intu's share price has fallen by about 93% in the last five years.
"The utilization of shopping centers is radically different today and will be in five years' time to where it has been," said Roberts, whose company owns and operates a mostly U.K.-based retail property portfolio worth about £7.5 billion, according to the Intu's third-quarter 2019 update. "What my customers want is for our shopping centers to provide a great experience [to visitors]. We can do that through in-mall activities, we can do that through events that they run in their shops, but also you can do it through adding in things like leisure."
The changing retail landscape will also see shopping center complexes developed to include other forms of real estate such as residential, offices and hotels, said Roberts, who was named CEO in April 2019. Roberts highlighted the company's plans for its Lakeside Shopping Centre on the outskirts of London, where it proposes adding 1,200 homes, offices and two new hotels to add to the one already there.
"What those great out-of-town malls give you is lots of surface car parking, so there's the opportunity to build out over the surface car parking and multi-story the rest of it," he said.
Roberts acknowledged that retail landlords were facing a much less predictable and secure future as retailers commit to shorter leases in the face of a rapidly changing operating climate. Still, this was a challenge Intu was willing to accept where possible, he added.
"I'm up for taking more operational risk into our business model and that may be through turnover rents, if the percentage is high enough, and it may be through shorter leases," said Roberts, adding that the company's Spanish properties, which it is in the process of selling due to its debt burden, tend to secure much shorter leases but are operating very successfully. "Taking operational risk on our [profit and loss] and on our balance sheet is something that we are not afraid of."
Recent political developments in the U.K. should help retailers and their landlords as businesses can now plan ahead with some certainty, Roberts said. The U.K.'s December general election resulted in an 80-seat parliamentary majority for the Conservative Party, which has dispelled some of the uncertainty around the U.K.'s departure from the European Union.
The U.K. is set to officially leave the EU on Jan. 31 but will enter a transition period during which it remains in the bloc's Single Market and Customs Union. Concerns remain around the U.K.'s future relationship with the EU after Prime Minister Boris Johnson's government placed a Dec. 31 deadline on the upcoming trade negotiations with the EU. Senior EU officials have said the December deadline leaves insufficient time to complete a comprehensive trade deal, raising the likelihood that the U.K. will exit the transition period with no deal in place, an outcome many observers believe will severely damage the U.K. economy.
"The reality is that like property investors who have been underweight the U.K. for the last few years since the referendum in 2016, my key [tenants] have chosen to be underweight the U.K. because of the political and economic uncertainty they would face when they're opening shops," Roberts said. "The good news is that with the election result in December, that has changed," he added, highlighting that Spanish retail giant Inditex, after months of holding off due to political uncertainty, signed a lease for a unit in Intu's St. David's Shopping Centre in Cardiff on the day the election was announced.
Intu is the subject of takeover interest from private equity firm Orion Capital Managers LP, which owns 10.04% of the company's shares, according to S&P Global Market Intelligence data. Orion is reported to be attempting to assemble a consortium to take Intu private. It follows a series of failed buyout attempts that included a consortium led by Brookfield Property Group LLC and a separate bid by U.K.-based real estate investment trust Hammerson PLC.
Despite Intu's ongoing difficulties, Roberts is confident the company has a bright future due to the quality of its assets. "My customers are telling me that they believe in brick-and-mortar retailing, that it has a big future in their estates. Yes, they are shrinking those estates, but they want shops in the top locations. Luckily, we own those top locations along with other U.K. REITs British Land, Hammerson, and Landsec."