What does the future hold for UK High-Streets? Commentary Piece

Commercial property investment used to be much easier than it is today. You used to be able to buy a unit on a high street in any town in the UK, and have floods of tenants wanting your space, and happy to sign up to 25 year leases as well. If you were lucky and were on a larger town or City, you might get a bullet-proof tenant such as Marks & Spencer or John Lewis and any bank would fall over themselves to lend to you. With a blue chip tenant like that, what could go wrong!?

With M&S announcing they will close up to 100 stores over the next few years, and House of Fraser having to re-negotiate all of their leases with their landlords to cut costs, it’s left many investors and banks scrambling.

So what does the future hold for the high-street?
Tenants:
The high street is getting hammered and previously thriving thoroughfares are now ghost towns. However, humans are social creatures and crave interaction. High streets are the centre of the local community and also transport infrastructure, so they will be re-invented over time.

Flexible workspace is certainly popular. The industry is dominated by some major US companies, and they have a cookie cutter approach that works well. As they have grown in strength, so has their attractiveness to property owners. As technology improves, the need for large office space where everyone aspires to have their own closed-door office has gone.

Shared offices promote creative space and environments, where individuals and companies can share ideas and learn from one another. Some of the stores that M&S are giving up, are perfect for this kind of tenant. Effectively blank canvasses; with high ceilings and large open floors that can be divided and re-configured to suit the needs of their occupants.

Social ‘experiences’ are also re-shaping our towns and communities. Now we live in a society where online shopping and communication, mean we can live for days and weeks without leaving our house, or even seeing or speaking to another human being face to face (except for the Amazon delivery driver), people want to maximize their social time.

Pop up restaurants and bars and indoor markets are well suited to this space, and the rooftops are perfect for outdoor entertainment; a rooftop cinema or bar, so you can sip an after work aperitive whilst soaking up the 360-degree vista.

Other uses:
As companies need less office space, due to technology improvements and flexible working, conversely the space that individuals want at home is increasing. It’s now more common to have a designated workspace setup at home and combine this with changes in social behaviour (people getting married later) and demand for more balance between life and work, town centre locations are perfect for Permitted Development (converting to residential use).

Many of these buildings have an ornate façade, and again due to their large open floors, can easily be reconfigured into living space. It reduces development risk, as it is akin to a re-furbishment, rather than out of the ground development.

The lenders view:
Many banks have been slow to change their policy on these assets. The majority of commercial investment loans are offered for 5 years, and the lender wants to see one main tenant, or anchor tenant to have a lease longer than that 5 year term. As a landlord, such tenancies are much harder to find these days. Even if you do find one, how do you know where that tenant will be in 5 or 10 years from now? Would M&S have predicted their current predicament back in 2005 or even in 2010? Tenants that were previously thought of as AAA covenants are now rated as ‘junk’.

However, other, more specialist lenders have been quicker to see this gap in funding and have grasped the opportunity to fill it. We are working on several deals at the moment, where blocks are multi-tenanted and no tenant has a lease longer than 3 years. It requires a little bit more work to get the deal done; to understand the history of occupancy, the demand in the area, etc., but we have the lenders to do it. If you’re a commercial landlord, don’t be held prisoner by your bank and their archaic view of what a ‘good tenant’ should look like. Shop around.

Similarly, with ‘transitional assets’, banks have also been slow to seize the opportunity. This is where a change of use, or refurbishment is occurring. For example, a tenant that has a few years left of a 25 year lease. Most of the space is sub-let and they won’t renew in 3 years, but it’s an office block in a town centre location. The owner could try and convert to residential or they could re-furb and re-invent themselves as a serviced office space. However, they don’t know for sure how it will play out, and their bank hates uncertainty. Again there are lenders we work with that will fund you now, then fund the re-furb or convert to a development loan (and then fund the loan into an investment loan at the end if needed). In the past you would have needed 2 or 3 lenders to complete that same journey.

The key here, as it seems to be with most areas of property and business as a whole, is having to work much harder to retain your clients (tenants). Speak to any business and the hardest thing is retaining talent. It’s no longer enough to offer a good salary and 5 weeks holiday a year. Employees want much more; and so do tenants (residential and commercial), therefore you need to keep re-inventing your space to meet changing demand.