The local councils embarking on a shopping centre spending spree
Bin collections, parking restrictions and filling ever-more-terrifying potholes are what most people associate with local councils. To that list, we might now add retail property speculators.
Last year, Councils across the UK doubled down on recent trends and spent some £232.35m buying struggling shopping centres, accounting for some 36 per cent of all shopping centre deals according to new data from Knight Frank.
But just as Councils are getting in on the market, the decline of shopping centres – and retail in general – is continuing. Footfall declined in every month of last year, with an overall drop of 2.5 per cent in 2019, according to Springboard figures.
Troubling times
Unsurprisingly, many of the big shopping centre landlords are struggling. Intu – the owner of Manchester’s Trafford Centre- is gearing up for a £1bn fundraise as it seeks to fix its balance sheet.
The owner of Birmingham’s Bullring, Hammerson, reached £577m worth of disposals last year as it sought to pay down its debt. And in November, Landsec – which owns the Bluewater Shopping Centre in Kent – took a £368m hit on the value of its properties due to retail failures.
Luckily for the traditional property investors seeking to exit or reduce their exposure to the troubled sector, local authorities are ready and waiting to snap up the assets, and they aren’t necessarily pushy on the price.
Councils have a responsibility to their local area and residents, so their move to halt the decline of shopping centres is understandable. When Canterbury Council bought the Whitefriars centre for £75m last year, the Council leader said it would “open up opportunities to shape the future of the city centre over the long term with decisions taken by a council working on behalf of its residents” rather than “investors whose interests do not necessarily align with those of the district.”
Out of their depth?
But whatever one’s intentions, Councils are not property experts. They often lack the in-house retail and property knowledge that real estate investment trusts and private equity backers are equipped with, meaning they can pay over the odds for a run-down retail asset. In Canterbury’s case, the Council claim it will open up a new revenue stream. But free marketeers are unsurprisingly concerned at what they see as a subsidy – paid for with borrowing which could, in theory, come back and bite taxpayers if the investments turn bad.
“It is effectively a subsidy for a failing model, and the only people that are going to win are the big landlords,” said a spokesperson for the Adam Smith Institute.
“What councils are doing is investing in effectively a failed model without understanding that the ‘all shops in one place model’ only works if you have a working or residential population nearby,” they added.
Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs, says: “Sometimes they are the only bidder, and investors know that and they want to sell to councils because they can make money from something they couldn’t make money from privately.”
“But some councils have done smart deals and been well advised,” he adds.
However, Knight Frank’s Mark Smith says it is a “defensive” move to stop a “spiral of decline” at the heart of the local community.
“The reality is in a lot of these cases, there is not an interested party that is going to stop and invest in the asset and maintain the vibrancy of the community,” he says.
Smith has predicted that hundreds more shopping centres could end up in the hands of local authorities, as they are increasingly forced to step in and take charge.
Long-term view
Although the relative inexperience of councils could present some issues, the fresh strategy they take could pay off in the long run. De Mello says councils are taking a long-term view on the investments.
“Councils can think 20 years ahead or longer, so what may not look like a smart deal now could be in the future,” he says.
But the truth is that some shopping centres no longer serve their purpose as retail hub. As the planning authority it is relatively straightforward for local councils to demolish the shopping centre and build housing or office space.
“They can repurpose and push it through planning,” De Mello adds.
However, Professor Len Shackleton, research fellow at the Institute for Economic Affairs, says: “Councils should focus their energies on working to reform planning regulations to allow market forces to breathe life back into town centres.
“They don’t have to become developers themselves.”