I recently read a fascinating article on the major challenges faced by retailers. The central theme was that retailers need to innovate or fail. However, while many retailers claim to be innovating, the majority of corporate retailer innovation is actually iteration.

Rupert Clarke

Long-established business infrastructures do not have the capabilities, culture or risk appetite to commit to the disruptive challenges of innovation.

Huge structural and technological changes have produced similar challenges for all in retail property. There is talk of creating experiential retail environments and destinations, all linked to a clear requirement for strategies and decisions driven by better understanding of consumer preferences and changing spending behaviours.

The first glimpse I had of the power of taking a different approach was over 20 years ago, raising project and investment finance for the newly formed BAA McArthurGlen outlet centre development. The business model was challenging for financiers because there were no zone As and no rents per sq ft, just turnover rents.

This approach clearly was (and is) innovative and dynamic. Asset management was about getting the right mix for the benefit of all the stakeholders, quickly replacing those occupiers unable to respond to the challenge – leases were short and structured to allow early landlord termination. The proactive culling of underperforming tenants and continual reconfiguring of the offer are vital for any retail centre. It is no surprise that outlet centres outperformed the wider retail sector in the post-global financial crisis downturn.

Heart of the community

What is the lesson for the traditional retail market? For the majority of the market – investors, financiers, advisers and retail specialists – the experience and related intuition to confidently navigate the future of retail property and innovate does not exist. Facing a choice of radical innovation or iteration, market participants are more likely to iterate their approach, although in many centres, bold innovation is required.

The best villages, towns and cities are communities. The heart of those communities is the central amenities: shops, restaurants, pubs, clubs, cinemas, markets and events. When these start failing, there is a domino effect, destroying asset values and sucking the social and economic life from the heart of the community. Retail investors and advisers need to act with clarity and confidence to have any chance of stemming this negative flow.

Bicester village

Bicester Village - innovative retail on show

The market’s lack of innovation is not the only barrier to change. An increasing number of larger tenants have shrinking space requirements and are unable to pay established estimated rental values (ERVs). Combined with the lack of alternative tenants and uses that are likely to be able to pay anything like the same ERV, it is not too difficult to conclude that the majority of non-prime retail centres are being held at values that are challenged by any realistic discounted cashflow analysis, making regeneration and reinvestment unviable. Hopefully, the latest round of CVAs will give property valuers ammunition to justify an acceleration of the downward shift in values to a more realistic and sustainable base value, enabling much-needed economic regeneration.

For villages, towns and cities to remain the focal point of local communities, owners need to be reconceiving and replanning sustainable uses and reimagining each centre’s reason for being, to make it a preferred and valued destination for the local community and a viable investment. Unlike previous downturns, current economic woes are not cyclical; they are structural. Hanging on in the hope that the market will get better is not an option.

Rupert Clarke is chairman of Milligan Retail