When Mark Allan strolled around Bluewater in Kent three years ago, he couldn’t shake the feeling that the vast shopping centre was simply way too big for the age of online shopping. The newly appointed chief executive of FTSE 100 property giant Landsec, Bluewater’s owner, began fretting over how to fill excess shop-floor space that, he reckoned, spanned about four football pitches.
Allan is happy to concede that his fears were overblown — he had underestimated the appetite of retailers such as JD Sports and Uniqlo to open bigger, brighter stores in Bluewater. Such was his renewed confidence, he bought an additional 25 per cent stake in the centre for £172 million two years ago. Now, he has bigger plans.
Landsec’s boss believes ‘prime’ shopping centres such as Bluewater — ones that dominate their local catchment area, currently valued at an investment yield of about 8 per cent — are some of the most attractive investment opportunities in a real estate market in the throes of profound change.
“We are convinced that prime retail is a sector that’s going to do well,” said Allan. “We would like to invest £500 million to £1 billion over the next couple of years.”
Allan, who made his name running the student accommodation firm Unite, is a respected figure in the property industry. However, his enthusiasm for shopping centres is, to put it mildly, not widely shared.
The industry is still reeling from the widespread adoption of online shopping, which helped spark a stunning collapse in values. Between 2018 and 2023, the cumulative worth of the UK’s shopping centres crumbled by about two-thirds — equivalent to £8 billion — according to the data provider MSCI.
For many of the country’s gap-toothed shopping centres, there appears to be no coming back. However, the eagerness of retailers to shut stores in moribund centres and open bigger outlets in more salubrious ones — on top of a broader return to in-store shopping after the pandemic — has strengthened Allan’s belief that the country’s shiniest shopping centres have a bright future. Could he be right?
There is tentative evidence that so-called prime shopping centres — such as Westfield’s two in London or The Trafford Centre in Manchester — are rediscovering their roles as destinations for a day out. Usage of bars and restaurants in prime malls, for example, has increased by almost a quarter over the past two years, according to the researcher CACI.
Vacant department stores have been carved up and let to “competitive socialising” operators, whose modern, boozy spin on activities such as mini-golf, go-karting and cricket has proved far more popular than yet another sale at House of Fraser. The basement of the old Debenhams in Westfield London will this summer be reopened as Toca Social, where patrons seek to outdo each other by kicking a football at targets on a screen.
“There is a lot of pent-up demand [for socialising] post-Covid,” said Scott Parsons, who runs Westfield’s two London shopping centres. “There have been five years of doom and gloom, but we hit the bottom and we’ve stabilised. Demand from occupiers is the best I have seen for eight years… the future is looking better.”
Allan’s view that shopping centres have been oversold is predicated partly on a belief that the glory days of e-commerce have gone for good.
The rising cost of debt has forced these once-freewheeling businesses to put profitability before growth. Retailers including THG and Boohoo, as well as store-based retailers such as Zara and H&M, introduced charges of £2 or £3 for customers wanting to return goods ordered online — a costly exercise they had long subsidised for the cause of building market share. Even the mighty Amazon hiked the price of a Prime subscription by £1 to £8.99 a month.
“Everyone’s happy to shop online if they can order as many things as they want and return half of them without having to pay the postage and packaging. Now that consumers are having to pay the true cost, we’re seeing a big shift in behaviour,” said Allan.
The cost advantages that online retailers long enjoyed over their store-based counterparts are eroding, too. Rents in the best shopping centres have dropped by about a third from their peak, and business rates have fallen, too, but online retailers are bearing the brunt of ever-increasing marketing costs.
Two bosses of online retailers said the cost of advertising on Google, which enjoys a near monopoly on internet searches, has risen at double-digit percentages for several years running. One e-commerce source likened the internet giant to the “greedy landlords” who mercilessly extracted ever-rising rents from bricks and mortar retailers in the boom years. A Google spokeswoman said search ad prices were determined via an auction and it was “constantly’ improving its advertising service.
However, others say it is way too soon to call an end to the digital shopping boom. Yes, sales growth online may be slowing, but the unprecedented surge during lockdowns meant a partial cooling was inevitable. Excluding food, the proportion of retail sales made online jumped from 31.1 per cent in 2019 to 49.3 per cent the following year, according to data produced by the British Retail Consortium and KPMG. Last year, that figure was 37 per cent, suggesting underlying growth has remained steady.
Marks & Spencer chairman Archie Norman is among those who believe that the online slowdown is merely an interruption to long-term growth. “Everyone does some of their shopping in stores and some online. That’s just the modern customer,” he said. “It doesn’t matter whether they are young or old — it’s just the way they shop.”
The main attraction of online shopping used to be the lower prices on offer from companies that weren’t burdened with the huge fixed costs of running shops. However, chief executive of Next, Lord (Simon) Wolfson, argues that the big draw for consumers now is that online retailers can offer a breadth of products way beyond what can be found in a shop.
Retailers such as Next, which have integrated their shops into substantial online operations — primarily through click-and-collect services — are emerging as the winners. Fitness fashion group Gymshark announced last week that its second store would be opening in Westfield Stratford, showing that even the most successful online brands want stores that can generate sales and project their brand.
Allan said he is confident of buying a prime retail asset this year. Landsec, which owns £10.1 billion of assets, concentrated in central London offices, is understood to have agreed heads of terms with Abu Dhabi Investment Authority (ADIA) on a potentially £300 million-plus deal to buy the sovereign wealth fund’s 69 per cent stake in Liverpool One, a 1.6 million sq ft centre featuring over 200 shops, more than 500 flats and four office buildings. However, ADIA is wavering amid concerns of selling at what could be the bottom of the market.
Allan, who declined to comment on the talks, could turn his attention to Meadowhall, the vast mall on the outskirts of Sheffield put up for sale last year by British Land at a £750 million asking price. Market sources also expect north London’s Brent Cross shopping centre and St James Quarter, a modern shopping complex in Edinburgh, to be put up for sale this year.
Fears over maintenance costs, and the sheer hard work of running an asset with hundreds of tenants on relatively short leases, will still deter many buyers. Yet retailers themselves have shown an appetite to step into the breach. Mike Ashley’s Frasers Group spent close to £100 million buying The Mall in Luton and the Overgate shopping centre in Dundee last year. Meanwhile, Ikea’s parent company Ingka bought Brighton’s Churchill Square shopping centre for £175 million in November.
“It’s a year to be bold,” Allan declared, before adding a dose of caution. “Without betting the farm.”
Landsec plans £1bn property fundraiser
Landsec is seeking to raise at least £1 billion in private capital to accelerate investment, in a sign that Mark Allan is calling the bottom of the real estate cycle.
Allan said Landsec had about £1 billion of capital to deploy but estimated the scale of investment opportunities was nearer to £3 billion.
“There are definitely more opportunities out there for us to deploy capital than we have capital available.
“We want to develop a private capital strategy where we work with partners who have a lower cost of capital and a longer-term investment horizon to pursue scalable strategies where we might be a co-investor and the manager or developer,” Allan said.
Allan has run Landsec since 2020. The company is understood to have explored a plan to inject some of its office assets into a new fund, then bring in private investment to finance work to improve the environmental standards of those buildings in the expectation of generating higher rents.
Allan said other private capital strategies could include “scaling up” in retail or accelerating residential developments in Landsec’s pipeline of ‘mixed-use’ assets. Landsec is targeting pension funds, sovereign wealth funds and high net worth individuals.
Allan said he felt comfortable taking Landsec’s leverage “up a little bit” from £3.4 billion and indicated he would be happy for debt to rise to about 40 per cent of the value of Landsec’s assets, currently valued at £10.1 billion. He said that this was a “time to be bold without betting the farm”.
His pursuit of private investment suggests he does not believe that Landsec, which trades at a 23 per cent discount to its net asset value, could raise the money as effectively on the public markets.
