Published by EG on 17/04/23
The 21st century has seen a massive transformation of UK high streets, especially for traditional retail. We have witnessed the decline of rents by up to 70% in many localities outside Greater London and long leases are now a thing of the past. What were once a safe bet for buyers ranging from institutions to private investors became a minefield as online shopping ate into turnover through the tills and over-leveraged retailers crashed and burnt.
However, if you have monitored any of our auctions you will have still seen concerted buying of high street property – and could be forgiven for wondering why. The answer often lies “upstairs or out the back” with the ability of these properties through either their upper parts or service yards/car parking to accommodate some form of residential development.
Since the global financial crisis, residential has been the saviour of huge tranches of redundant commercial space. From 2013 onwards, we saw regional office buildings being converted to residential through permitted development rights and the trend – albeit still on a small scale – is now proliferating across UK high streets.
As the retail market has gone through significant downward re-pricing coupled with a tightening in the availability of finance, the residential market has moved in the opposite direction with seemingly an insatiable demand for accommodation and a strong desire by lenders to lend. As such, residential has plugged an investment void left by the out-of-favour retail and office sectors.
Recent examples of this type of high street asset which we have sold include a substantial property on the pedestrianised Broad Street in Reading. It currently produces annual income of £141,000 from the ground-floor retail but also has a 2,088 sq ft vacant upper floor which has potential for residential conversion. We sold it on behalf of a major fund for £1.7m, the price reflecting, in part, the residential potential that the property offers.
The investments we have sold in central and Greater London immediately spring to mind as examples of where residential can be the main driver of capital value, but this is happening at an increasing pace across the UK. Examples include the Edinburgh Woollen Mill in Richmond, North Yorkshire, which has a ground-floor store plus planning permission to turn the upper floors and rear extension into several residential units.
From an investor’s point of view, with commercial values having dropped dramatically and with more flexible planning policies, mixed-use commercial and residential opportunities are beginning to make economic sense. They don’t all have to be on the scale of King’s Cross or Spinningfields.
Investors see the mix of income spreading the risk of the investment and offering future asset management opportunities. Also, buying an asset which has longer term residential potential and provides “meantime” income – through the rent being paid for the existing retail use – gives investors the time and financial elbow room to work up their plans without carrying all the burden of the attendant costs.
The well-publicised volume of pub closures is also a contributing factor. Last year we sold a Grade II listed former public house on Edgware high street which also had a substantial car park to the rear that offered space for residential development. The sale price of £2.85m reflected a net initial yield of 5.02% and the property’s mixed-use development capability.
In many instances, subsequent development of these properties will still feature a retail or leisure element as investors like the blended approach of an asset which provides income streams from two different sources – and with differing scope for future rental uplifts.
The marketplace that has been created around commercial auctions represents an extremely efficient method of supporting this investment focus by bringing appropriate assets to market and enabling would-be buyers to run a rule over multiple properties that are currently available.
And, as UK institutional investors continue to divest themselves of assets which no longer fit their fund profiles, and the banks and their insolvency practitioner advisers seek to reduce their non-core loan exposure to real estate, there should be a continued stream of these retail-to-resi opportunities.
