Crystal Palaces
Shopping Centre investment can be good retail therapy
The origins of department stores in the UK are rooted in modest beginnings, with many founded by young, working-class entrepreneurs who started out as small traders. As depicted in Victoria Glendinnig’s intimate portrait of the history of the John Lewis Partnership in her book ‘Family Business,’ William Edgar and George Swan launched a market stall on Piccadilly – long before Piccadilly Circus emerged as part of Nash’s redevelopment of Regent Street – paving the way for the establishment of Swan & Edgar, where John Lewis would later learn his trade.
John Lewis went on to become a judicious radical and advocate for leasehold reform. In the early 20th century, he clashed with the Portland Estate over plans to expand his Oxford Street store into two residential properties on Hollies Street, one of which bordered Cavendish Square. The Portland Estate sought to maintain the social prestige and architectural integrity of the square, stipulating that the interiors remain suitable for potential conversion back to private residences. However, Lewis disregarded this agreement, transforming the interiors into commercial showrooms and altering the building’s façade. A compromise was eventually reached, allowing John Lewis to continue his expansion while partially respecting the Estate's conditions.
Department stores gained prominence at this time, particularly with the spread of the railway network, catering to the demands of a rising upper middle class and reshaping the face of urban centres. In ‘The History of Mr Polly’, H.G. Well’s second novel about the drapery trade, his eponymous hero is apprenticed “in one of those large, rather low-class establishments which sell everything from pianos and furniture to books and millinery – a department store in fact, called the Drapery Bazaar”. Department stores ceased to be ‘rather low-class’ and the terms ‘draper’ and ‘drapery’ no longer correctly described either the entrepreneur or his enterprise. Yet the terms survived. From Lewis’s of Liverpool to Kendals’ of Manchester, these stores became iconic fixtures, their names intertwined with the identity of towns and cities across the country.
The rise of internet shopping has resulted in the decimation of department stores, leading to the closure of many famous names like Debenhams, House of Fraser, BHS and Beales which were the anchors to many shopping centres. However some investors think that the nadir may have been reached, with investment volumes reaching a seven-year high this year, totalling £1.3 billion in transactions from Q1 to Q3. Moderate capital growth and solid income returns are set to make the shopping centre sector one of the strongest performers in the UK commercial property market, with an expected total return of 8.4% in 2024.
However, demand isn't uniform across all locations. In Bolton, plans for the town centre include demolishing Crompton Place, purchased by the council in 2018, with demolition slated for 2025. The redevelopment aims to create a mixed-use space, including housing, retail, leisure, and health facilities. It's estimated that 12% of UK shopping centres face demolition, to be replaced by non-retail-focused developments.
Retailers are also making alternative plans for their retail assets. John Lewis’s early plans was to convert private residences into his department store venture; John Lewis and their ilk are looking to do the reverse. John Lewis recently secured planning approval to add 350 flats above a Waitrose store in outer London, marking a milestone in its venture into property development. This comes after the company revised its strategy, abandoning ambitious targets to make half of its profits from ventures like build-to-rent by 2030. Despite the shift, John Lewis insists that residential property development remains a key part of its future plans. Some analysts have criticised the move into BTR as a distraction, but Katherine Russell, who heads the retailer’s rental housing strategy, sees it as an opportunity to bring projects to life more quickly and the retailer remains committed to its property ambitions, particularly through a £500 million partnership with investment manager Abrdn to build 1,000 build-to-rent homes.
This strategic shift is not without challenges. A proposal for a 144-unit build-to-rent scheme next to a store in Ealing faced local criticism, leading to a revised plan focused solely on affordable housing. Other projects, like a 350-unit development in Bromley and a potential scheme in Reading, aim to repurpose underutilised sites. While John Lewis remains focused on its core retail operations, the company is betting that its property development projects will play a crucial role in revitalising its fortunes.
Costco, mainly in the United States, is also seeking new revenue streams beyond traditional retail spaces with a major mixed-use development in South Los Angeles. Partnering with Thrive Living, the project will feature an 800-unit residential complex situated above a new Costco store in Baldwin Hills. This development, set on a 5-acre site, will include affordable and workforce housing, along with various community amenities such as courtyards, a rooftop pool, and fitness areas. The units will be built using prefabricated modular construction, facilitating quicker development.
Meanwhile, the US luxury department store landscape is undergoing a transformation with the recent merger of Saks Fifth Avenue and Neiman Marcus, two of North America’s leading luxury retailers. The merger, assisted by investments from Amazon and Salesforce, has raised questions about whether technology can revive the struggling department store business model. Amazon’s involvement is expected to focus on enhancing logistics and tech support, but challenges remain as these iconic brands strive to modernise and stay relevant.
Whilst the operator behind most Ikea stores, Ingka Centres, is aiming to expand its mall portfolio, it is also aiming to diversify them with attractions like coworking spaces, children's play areas, and Nordic-inspired food halls, according to The Wall Street Journal. “People are looking for places that offer much more, not only shopping. If you bring in more reasons to visit, then people will still come” said Cindy Andersen, Managing Director of Ingka Centres. Foot traffic in U.S. malls dropped 4% in 2023 compared to 2022, and remains 12% below 2019 levels. Numbers like that have sent many former mall retailers scurrying to strip centres and urban cores, but Ingka has invested $65m into innovative concepts to revitalise mall spaces.
The shift towards mixed-use spaces is not limited to the UK and US; a recent PwC study highlighted that converting former department stores in Germany to mixed-use properties is only viable in major cities with high achievable rents. Analysis of 37 department stores in western and southern Germany, which closed between June 2023 and January 2024, found that conversion is generally worthwhile in high-demand "A" cities and some "B" cities. However, in smaller "C" and "D" cities, lower expected rents make conversion economically unfeasible unless local authorities provide financial incentives, such as subsidies or public acquisition of properties.
PwC’s Benjamin Schrödl, who conducted the study, said: “In A and some B cities, the derived residual value is therefore at a comparable level to previous department stores’ transactions. Mixed-use conversions generally make sense here.” According to Schrödl, the difference in achievable rents for other types of use, such as offices, retail and senior living, is also similar between A and C cities. Expected rents are even lower in D cities, which means that the achievable rental income in those cities would be in stark contrast to the conversion costs, which range between €3,000/sq m in metropolitan areas and €2,000/sq m in smaller towns. Schrödl added: “Economically orientated investors will not invest under these circumstances. The local authorities concerned should therefore create concepts for financial support for developers. This could be, for example, building cost subsidies or the purchase of the department stores‘ property by the municipality.”
Even Redevco – historically a retail focussed investor borne from textile merchants which later became C&A – is actively considering expanding into real estate lending as part of a broader strategy to diversify its business. This move aligns with the company's goal to increase its portfolio from €7.5bn to €10bn by 2025. Redevco is particularly interested in green lending opportunities, reflecting a focus on sustainability as it aims to contribute to more sustainable urban developments. The diversification efforts are driven by changing urban demands and the need for flexible, mixed-use spaces.
The archetypal department store, Selfridges, now 40% owned by The Saudi Public Investment Fund (PIF), never ceased to innovate during the pandemic, finding creative ways to engage and delight its customers. From opening an in-store cinema and hosting unique weddings to launching an open-air Christmas fair, the legendary department store remained a beacon of inspiration. This spirit extended to a more sustainable approach to retail, with Selfridges entering the fashion resale and rental markets, demonstrating that even in challenging times, creativity and resilience can thrive.
The move marked yet another significant chapter in Selfridges' history – a story as dynamic as its original founder, Harry Gordon Selfridge (not its most recent owner, Rene Benko). Known for his flamboyance and visionary retailing, Selfridge's life ended in contrast to his grand ambitions; he was ousted from the board in 1941 after incurring gambling debts and died penniless in 1947. Yet, his legacy of innovation and daring continues to define the brand. As Selfridge himself once said, “There are no hard times for good ideas.” Department stores need to constantly innovate and iterate, and residential construction on top of or adjacent to existing centres is “a good idea,” but not the solution. As it happens, many conventional department stores have survived and will thrive in this new economy. Even the tech giants – the captains of innovation – seem to agree.