Basildon has been here before. When department store chain Allders went bust in 2005, a new tenant quickly moved into the large unit that anchors the Eastgate shopping complex in the centre of town.
This time, the Essex town 30 miles east of London may not be so fortunate. On Tuesday, the chain that took over the vacated Allders store — Debenhams — said it would go into liquidation in the new year. The collapse of the chain, which has a 200-year history, is part of a wave of retail insolvencies and painful restructurings sweeping through the UK’s town centres that are reeling from the impact of the pandemic.
Debenhams’ failure will leave a 200,000-square-foot gap in the shopping complex. Arcadia, owner of the Topshop store in the same mall, went into administration a day earlier, putting over 400 stores and 13,000 jobs in peril. Many of the other tenants have used insolvency processes to push rents down; fashion chain New Look recently switched to paying rents based on turnover.
Basildon is a “new town”, developed from the 1950s to accommodate London’s postwar overspill. It was planned around the car and retail dominates its core. But it is also a short drive from the giant Lakeside shopping centre and an out-of-town leisure complex known locally as “Bas Vegas” that draw visitors away from the centre.
The pull of Lakeside along with the shift of retail online had resulted in a gradual exodus of shops — Marks and Spencer closed its store in the town centre two years ago — even before the Covid-19 pandemic.
Now, the trickle is becoming a flood; earlier this year all 530 Carphone Warehouse stores were closed and in November J Sainsbury said that over 400 standalone Argos stores would be gone by the end of 2024. The lifting of lockdown measures for the festive period may not be enough to save some chains.
Nationally, the vacancy rate in retail is now 13.2 per cent, according to the Local Data Company. But in some towns, especially in the north of England and parts of Scotland, it is almost double that. Vacancy rates in shopping centres are almost twice those of retail parks.
There are currently around 44,000 units standing empty. Property company JLL estimates that figure will nearly double in the next few years, leaving 80,000 redundant shops littering UK high streets.
‘Too much space’
In many countries, the combination of the explosion in ecommerce together with the pandemic and its impact on offices and retail is prompting a wide-ranging and difficult rethink about what the purpose of town and city centres will be in the future.
In the UK, the problem is particularly acute given the role that retail has played in town planning. Alistair Kefford, an urban historian and planning expert at the University of Leiden in the Netherlands, says the surfeit of empty shops in British towns is the result of a particular approach that planners took in the second half of the 20th century.
“The public and private sector went for broke in the 1950s and 1960s in terms of expanding retail development in towns and cities,” he says. Every other land use was squeezed out as retailers, chasing sales as incomes rose and access to credit widened during the 1980s and 1990s, bid rents higher and higher. “Shop rents in these redeveloped centres were so much higher than what went before . . . whole swaths of small businesses were destroyed.”
Now the party is over, the owners of retail property are left with two options: either slash rents to bring in new tenants or repurpose shops for alternative uses.
Neither option is palatable. When Woolworths went bust in 2008 its 800 stores, mostly single units on high streets, were taken over relatively quickly by budget retailers such as Poundland, B&M, Home Bargains and Iceland.
But in the 11 years since, the proportion of retail sales made online has quintupled, from less than 6 per cent to 28 per cent. Few brands are now opening bricks and mortar stores, and those that are tend to prefer out-of-town retail parks where rents are lower and access easier. Even high-street stalwarts like Next and Marks and Spencer are increasingly closing town centre stores in favour of purpose-built units on the outskirts.
“Retailers are using this as an opportunity to consolidate their portfolios and it’s a much easier call for them right now to commit to new leases out of town,” says Darren Richards, head of real estate at British Land. The company is landlord to around 20 Arcadia stores and seven Debenhams.
Larger stores with their high running costs are harder still to re-let. A quarter of the 160 stores vacated by BHS when it went bust in 2016 are still vacant, according to the Local Data Company.
One way to fill the gaps is to drop rents to a point where taking on new leases becomes economical to retailers once again. In the case of some British Land sites, particularly out of town retail parks, that has already happened, according to Mr Richards.
But it is not a viable option for everyone. “The very simple and powerful maths is that, fundamentally, there’s too much shopping space,” says Mike Prew, an analyst at financial services group Jefferies.
“You have to cut rents to an affordable level,” he says. “Our working assumption is rents fall 30 per cent from current levels. And you have to shrink the floor space by 30 per cent as well, meaning a 51 per cent cut of incomes from the shopping centre.”
A growing number of retailers are demanding leases linked to store sales rather than fixed amounts that can only be changed when the lease ends or through an insolvency process.
But these leave property owners, whose costs are largely fixed, with no certainty over their income streams. “If I have all the hassle of running the carcass of a shopping centre just for turnover rents, I might as well just pick stocks in a few retailers,” says Mr Prew.
Landlords are looking over their shoulders at lenders. As incomes from retail tenants tumble they face the growing risk of breaching loan covenants, which might ultimately result in banks taking control of their assets.
“The lenders have been very supportive by and large, but people are going to be in material breaches [of their covenants] early in the new year,” says Melanie Leech, chief executive of the British Property Federation, which represents property owners.
“If we’re not careful banks are going to end up owning most of the retail stock in the UK [and] I don’t think banks want that or will know what to do with it,” she adds.
Attention is turning to other uses for buildings currently occupied by shops. Basildon was already planning a revamp of its town centre based on less retail and more residential developments — the short train ride to central London makes it attractive for young workers priced out of the capital.
It plans to demolish part of Eastgate, once the largest covered shopping centre in Europe, and convert the space into a “multi-use space featuring retail, workplace, town-centre eating and leisure”.
Elsewhere, former shops have been repurposed as rental housing, offices or community space. When Debenhams’ unit in Guildford, Surrey, came to the market for £20m earlier this year, a retirement housing developer and a hotelier were among the bidders.
A former John Lewis store in Southsea, Hampshire, is being turned into a mixed-use development, including serviced offices and a cinema, while something similar is planned for what was once House of Fraser in Birmingham.
But such a transition is rarely straightforward. The strictures of the current planning system and the challenge of converting interiors built for a specific use mean that in many cases “all [repurposing] does is limit the downside of the retail asset rather than make you money,” says Mr Prew.
And the sums have to add up. “The build cost for a good-quality, high-density residential development is around £200-250 per square foot and that’s before any acquisition or demolition costs,” says Mark Williams, director of RivingtonHark, which specialises in town centre regeneration projects. Conversion to quality office space is around the same.
“In the south-east and in some other key cities like Bristol or Manchester, property values exceed those costs. But in large parts of the country they don’t”.
Simon Wolfson, chief executive of fashion retailer Next, cites a store where it paid rent of £1.7m in 2018. The company estimated in 2019 that the same floor area would generate £1.2m as offices and £1m as residential — not including the cost of conversion, which could be as high as £20m, or the lost rental income.
Lord Wolfson acknowledges that a landlord may consider a lower return a worthwhile trade-off for a less risky type of tenant. But he still believes that in most locations, “it will be the highest paying retailer that determines rental levels for many years to come.” The pandemic has not changed this view.
Mr Kefford, the urban historian, agrees: “If it’s left to market forces you’ll get redevelopment in areas where it works. Everywhere else, nothing will happen”. He adds that regeneration has to be tailored to location, pointing out that “no one is going to want to live in yuppie city-centre flats drinking £4 coffees” in areas where incomes have been stagnating for decades.
Increasingly, both local authorities and national government accept that public funding will be needed to bridge the gap between what is required to revive towns and what is financially viable. A total of £3.6bn has been earmarked, split between a Towns Fund and a Future High Streets Fund.
The government is in the process of assessing bids from over 100 local authorities, all of which have been told to focus on helping town centres move beyond retail rather than subsidising more of it.
Mr Kefford fears that the money will not be sufficient, and that much of it may end up in relatively superficial public works projects, such as new street lighting. With more large retail chains likely to follow Arcadia and Debenhams, he says radical action may be needed in many parts of the country unless Britons are prepared to tolerate a lot of empty shops for a long time.
“Central government has to empower local authorities to use planning powers and buy property at less than its market value,” he says. “But I cannot see that happening.”