Does high street decline represent opportunities for resi investors?

18 September 2020 | Investment

Covid-19 has furthered the decline of the high street and led to major city centres becoming virtual ghost towns as office workers and tourists continue to stay away.

But what to do with all the buildings – restaurants, shops, cafes, department stores, shopping precincts, takeaway venues, etc – that now require a change in use thanks to rising rents, falling profits, dwindling footfall and Covid-19 restrictions?

For a while now, people have talked of the need to repurpose city centres and high streets as the rise of online shopping and changing consumer behaviour has reduced the desire for retail units.

Even before the pandemic, many major retailers had gone to the wall in recent years. Covid-19 has supercharged that. And it has also dealt a significant blow to the office.

Here, Property Investor Today explores whether offices and city centres will ever revive, and what the alternatives could be if, as seems increasingly likely, that doesn’t happen. 

Will work and city life ever look the same again?

The government is doing all it can to encourage workers back to their offices to boost city centre economies. But with so many people now used to working from home, and enjoying the extra freedoms and flexibility it affords, is this really realistic? 

“The office property market has declined a bit as a result of the interruption to demand from tenants and the sharp fall in investment interest,” John Redwood, Conservative MP and chief global strategist for investment company Charles Stanley, said.

“The amount of available space has risen from 14 million square feet to above 17 million square feet and will continue upwards if tenant demand remains this depressed.”

Redwood, a former Cabinet and Shadow Minister, said this is a global problem, with cities from Lisbon to Mumbai witnessing oversupply and weaker markets. 

“Many global companies are thinking about how much central city office space they want in the future, and many are delaying commitment to new and bigger space whilst they see how recovery pans out.”

Redwood believes it’s not all doom and gloom for commercial property, with food stores picking up business since they were allowed to reopen again – boosted further by the Chancellor’s Eat Out to Help Out scheme. But he also thinks there is scope to convert more commercial property into residential.

Does high street decline represent opportunities for resi investors?

He recognises that today the centres of many great cities are strangely quiet. “Office workers are reluctant to get back on the trains to come into work when many can succeed from home. In an age of social distancing in many countries, it would be against government guidance and in some cases against the law for employers to expect staff to get on crowded trains or to work in densely packed offices using cramped common areas and meeting rooms.”

Recent surveys in the UK show a marked reluctance by many to get back to five days a week city office working, with some suggesting that one in seven current home workers expect never to return to the office. Widespread home working seems certain to continue as we enter winter and the possibility of a second wave of coronavirus, which is likely to reduce the need for office space and the retailers which thrive on office workers for their custom.

High street footfall returns, but cities struggle

While recent data from the Centre for Cities’ Street Recovery Tracker, in partnership with Nationwide Building Society, revealed footfall in many of the UK’s town and city centres recovered to pre-lockdown levels this summer, the share of people returning to the workplace has not increased since late June.

This suggests there could be a lot of office and retail space which is ripe for conversion into new homes or developments.

According to mobile phone tracking data, overall town and city centre footfall increased by 7% to 63% of pre-lockdown levels since the beginning of August.

In 14 of the UK’s 63 largest cities and towns, city centre footfall in August exceeded pre-lockdown levels, but seaside towns and smaller towns such as Birkenhead and Chatham proved particularly popular. By contrast, overall footfall in larger cities remains well below the national average, at just 31% of pre-lockdown levels in Central London, 49% in Manchester and 52% in Birmingham.

Crucially, the data also showed that weekday worker footfall in the centres of the UK’s largest cities and towns remains at just 17% of pre-lockdown levels on average – exactly the same as it was at the end of June.

The share of people returning to their places of work is even lower in many of the largest and most economically prosperous cities, with London, Leeds, Birmingham, Manchester and Cardiff all still below the UK city average.

Weekday worker footfall in smaller cities and large towns is higher, at on average 27% of pre-lockdown levels, but still significantly lower than normal. The research found that nowhere has yet reached even half of pre-lockdown levels.

The persistently low numbers of people going back to work in city centres, particularly in big cities, reinforces the concerns for the future of shops, cafes, restaurants and bars that depend on office workers for trade, the research said.      

“There is little indication that workers are heeding the government’s call to return to their offices and city centre restaurants, pubs and shops face an uncertain future while they remain at home,” Andrew Carter, Centre for Cities’ chief executive, said. “So, unless we see a big increase in people returning to the office, the Chancellor must set out how he will support the people working in retail and hospitality who could soon find themselves out of a job.”

Does high street decline represent opportunities for resi investors?

In London, there are a number of emerging trends in the capital’s office property market, which could grab the interest of residential investors keen on change of use. 

Clive Buckley of global workspace broker First Office Hub, in his September summary of London’s office sector, said: “Our clients are telling us that they’re seeing more and more staff coming back to their offices, particularly since the schools have gone back, and that they predict close to 75% of staff will be back working from an office, in some form, by January 1.” 

He added: “Multiple companies are now downsizing to accommodate WFH, staff rotations, shifts and commuting restrictions. We’ve seen a 50% increase in enquiries over the past month from businesses looking to downsize to 1,000 square feet.”

Will there be opportunities for property investors and developers?

Gareth Belsham, a director at real estate consultancy Naismiths, believes it’s inevitable that there will be an increase in retail/office to resi conversions as a result of falling footfall and workers not returning to the office.

“The retail sector has long been struggling and the new planning policy is geared towards facilitating a change in use, with various government schemes to support this,” he said.

“City centres are still empty at the moment, with businesses reliant on office trade set to suffer. But the sector has long had problems, pre-dating the pandemic. Covid has brought it to the fore.”

He thinks those operating in the resi market will look towards conversions, but there are challenges. Many retail/office units are purpose-built, which makes turning them into habitable, scalable residential properties a tricky task with sometimes complex planning requirements.

Does high street decline represent opportunities for resi investors?

We only need to see the struggles of Tim Wheatley, the property developer starring in BBC2’s ‘Manctopia’ documentary series, to understand the potential issues with conversions – particularly of older buildings.

Belsham reckons the new rules on Permitted Development Rights (PDR) are a good thing, but also create issues in getting people up there with smooth access and making sure the housing is affordable. There might be more demand for swanky penthouses on top of existing building, but the need is for more affordable homes, which are less cost-effective to build.

“Town and city centres need to be reimagined and the retail sector is not going to do that. Online shopping is here to stay, sounding the death knell for retail on the high street,” Belsham added. “Residential is the obvious thing to step in, even if there are practical difficulties in getting it done.”

The recently announced proposals for radical and sweeping changes to England’s decades-old system could help to incentivise commercial to resi conversions.

Under the changes announced by Housing Secretary Robert Jenrick, there will be no requirement for full planning applications when it comes to demolishing unused buildings such as retail and offices and rebuilding them as homes.

Bureau Veritas believes that the decision to remove red tape when changing the use of buildings into residential is undoubtedly a positive one.

It’s hoped that the changes will help to revitalise town and city centres hit hard by the coronavirus, enabling properties to be ‘quickly repurposed for residential use, supporting local housing need and reducing the pressure on greenbelt land’. 

Already in play, since August 1, has been the changes to PDR, allowing homeowners to add up to two additional storeys to their home through a fast track approval process, assuming they meet certain conditions surrounding impact, appearance and neighbour consultation.

Andy Lowe, from the Building Control team at Bureau Veritas, says the biggest shake-up of the UK planning regime for more than 50 years is undeniably controversial, but ‘firmly believes’ that the government’s intent on removing bureaucracy from the planning system for developers who convert offices/retail units into homes is a welcome stance.

“It unlocks the potential of unused spaces for conversion planning applications, ending years of delays in some cases. And in doing so, it can help to revitalise town centres and bring a new sense of purpose to disused buildings.”

This post has originally been featured in Property Investor Today.