Reimagining Retail:
Solutions for Repurposing High Streets
This article was first published in Property Investor News, March 2024
Retail’s reaction to the Covid-19 pandemic is well documented. The UK retail market has faced unprecedented challenges, leading to an oversupply of retail space, and shifting dynamics on high streets across the country. However, within these challenges lie opportunities for savvy investors who can think creatively and adapt to changing market conditions.
Post-pandemic, the UK retail market still finds itself in a state of flux, characterized by an imbalance between supply and demand. With retailers and banks rationalising their portfolios, many high streets are grappling with vacant storefronts and declining footfall. Shorter lease lengths and falling rents reflect the shift towards a tenant’s market, while changing consumer behaviours and the rise of e-commerce continue to reshape retail dynamics. Secondary shopping centres are lying half empty, being sold at ridiculously high yields, but still too expensive to justify wholescale demolition in many cases.
There’s a pressing need for innovative solutions to revitalise high streets and unlock the latent potential of retail properties. The UK Government is introducing an increasing array of permitted development rights (PD rights) in England, which are welcome and can create game-changing strategies, but many SME investors think that the only solution is simply to convert to residential. There are other ways high street units can be repurposed, and even brought back to life again. In any event, multiple exits when assessing commercial deals is the main cornerstone of any purchase – it’s always important to make sure that you have alternative plans to cover all eventualities.
Strategies for Repurposing Retail:
1. Changing Use Within Class E:
The introduction of Class E has presented an amazing opportunity to convert commercial buildings into a huge range of alternative uses without the need for planning permission. This presents an opportunity to breathe new life into vacant properties. Class E uses include retail shops; financial and professional services; restaurants and cafes; offices; research and development; light Industrial with activities (near residential); clinics, health centres, and creches; gyms and indoor recreation; indoor play centres; art galleries etc.
Consider converting retail units into serviced offices, co-working spaces, or flexible workspaces. As remote working becomes more prevalent, there is growing demand for alternative office solutions that offer flexibility and amenities. By tapping into this trend, landlords can maximise occupancy and generate stable rental income while catering to evolving workplace preferences.
2. Adding Extra Income Streams:
Diversifying income streams is crucial for enhancing the financial performance of all commercial properties and can be a great solution to increasing commercial valuations. Explore options such as installing electric vehicle (EV) charging stations, solar panels for renewable energy generation, or (now less popular) leasing space for telecommunication antennas. Additionally, advertising hoardings can generate (sometimes significant) supplementary revenue on busy transport thoroughfares. These initiatives not only bolster the bottom line but can also align with sustainability goals and community engagement efforts. In addition, there are several grants available for some of these uses – for example, the UK Government offers grants for the installation of EV charging points.
There are now PD rights in England that allow you to install, alter or replace solar equipment on commercial property without planning permission (but with prior approval) and also PD rights to place a solar installation on covered car parks without permission, and also within the grounds of a commercial property.
3. Niche Markets:
As many of you who follow me will know, I always recommend that you niche your investment strategies in order to facilitate higher than average returns in areas with less competition. Indeed, where niching is concerned, it’s worth ‘slowing down to speed up’ in order to really nail your niche before you invest. Identifying niche high streets in locations where demand is higher than supply, and where socio economics and demographics are favourable, can unlock opportunities to invest in retail that is likely to be profitable into the medium term. The sweet spot tends to be smaller high streets with strong catchments, where smaller retail concepts can thrive. Get in the car and drive around small towns close to you, and you may be surprised at how retail is flourishing! As always with niching, there will be winners and losers so do your due diligence carefully before you invest.
4. Repurposing to Residential:
Repurposing retail space for residential use can be a great strategy, particularly in areas with high GDV end values. Explore permitted development rights such as Class MA and Class G in England, which facilitate the conversion of commercial premises to residential use. By leveraging these rights, landlords can transform vacant retail properties into residential units, capitalising on the growing demand for housing while revitalising high streets.
Class MA permitted development right allows for the change of use from commercial premises (Class E) to residential use in England, with prior approval. Under recent changes to Class MA, the maximum floorspace limit of 1500sqm for buildings changing use under the permitted development right has been removed. The three-month prior vacancy condition has also recently been removed.
Local authorities will assess the application against various criteria, including transport and highways, contamination, flood risk, noise, natural light to all habitable rooms, as well as minimum room sizes. There are exemptions in certain areas, and there may be Article 4 restrictions locally.
Class G permitted development right allows for the change of use from commercial premises, above Class E in England, to residential use in England, subject to prior approval. This right enables landlords to repurpose the upper floors of commercial properties into up to 2 flats. The Government is likely to introduce changes shortly to increase this to 4 flats.
5. Transformation into Different Commercial Uses:
Thinking beyond traditional retail, consider repurposing vacant retail spaces for entirely different commercial uses. This is a well-worn path in the commercial world – for example, out of town retail emerged from redundant industrial units on the edge of city centres. In London, out of town retail is now slowly being converted back to logistics as retail parks with short leases come on the market.
Former department stores in town centres have been bought by Ikea and, in Gloucester, the University of Gloucester has bought the former Debenhams for new campus space in a massive refurbishment project.
The big head-scratcher in town centres is what to do with these large buildings that have been left vacant after the spectacular collapse of businesses such as Arcadia, during Covid. This includes shopping centres and department stores, in particular, but also medium sized shop units (MSU’s), usually occupied by the likes of the large clothing brands. There is a race to prime with shopping centres, and secondary centres as emptying out rapidly. Eventually these will become great redevelopment opportunities but are notoriously difficult to convert. There are lots of innovative approaches being looked at to repurpose these – converting to residential being the obvious one. They are also being looked at for last mile logistics hubs (although their design doesn’t lend themselves naturally to this use) as well as hospitals, education establishments etc.
Other alternative uses for retail space in town centres can include hotels and aparthotels, and serviced accommodation – shortly to have its own use class (C5). You will be surprised at the number of PD rights, in England, that allow conversion to alternative commercial uses, as well as allowing extensions to commercial units.
Depending on location, consider tapping into both local and national grant funding to assist with repurposing projects. Funds such as the Towns Fund, High Streets Fund or Stronger Town Fund. These can contribute towards the costs of design, infrastructure development and site delivery of repurposed retail projects.
6. Environmental Sustainability
When the tougher EPC regulations come into play, it is estimated that a massive 83% of retail stock nationally will need to be improved by 2030.
In addition, retail premises, location, transport modes and delivery models need to keep pace with retailers and consumers, whose requirements are evolving to embrace a surge in consumer demand for more sustainable and ethical products.
I’ve long held the view that SME investors need to catch up in this space as corporates prioritise the ESG agenda. More than anything, embracing this can provide you with a competitive advantage – many retail brands are now just not willing to look at units that don’t have a decent EPC.
Conclusion
In summary, in the ever-evolving retail landscape, there are some great opportunities to repurpose retail space as residential. But the opportunities are far wider than that and looking at all angles when you are considering a purchase will help you not only cover your downside risk, but you may well come up with a more innovative and higher value use as a result of this exercise.
