COVID Closures Create Opportunity for New and Established London Retailers

With a sharp decline in footfall stemming from the rise of remote work and a decline in tourism, the retail sector in London has transformed dramatically since March 2020. Comparing pedestrian footfall activity, Google reports that in June 2020, footfall in retail and recreational areas across London fell by 65% in comparison to before the pandemic. To understand how the retail market has navigated this degree of decline, LoopNet met with local experts to discuss the latest trends, opportunities and challenges affecting the city’s retail scene.

For tenants, one positive effect of the pandemic has been lower rents. According to a retail market report published in April 2022 by Mark Stansfield, senior director of market analytics at CoStar UK, average asking rents declined by 2.8% over 12 months between April 2021 and 2022. However, according to experts interviewed by LoopNet, that drop in rent is not expected to last.

Not only are retail rents dropping, but lease lengths are shortening. “Over the years, 10-to-15-year leases have been the norm, but these days six months to three years is probably more common,” said Stansfield. One exception to this trend is that grocery stores continue to sign longer leases.

London endured a particularly difficult pandemic, especially for retailers on Oxford Street as the number of office workers and tourists declined. “People usually work on Oxford Street and tourists come to shop, but during COVID, people did not come as much,” said Jonathan De Mello, Founder and CEO at JDM Retail. “Bond Street especially is about tourism, so these types of areas where people don’t live suffered.”

In the second half of 2021, London’s retail vacancy rate hit a nine-year high, according to the CoStar retail market report. Many major retailers closed their doors during the pandemic, including Debenhams and clothing brand Topshop. Some of those stores closed permanently, whereas others — such as Topshop, which was bought by ASOS - transitioned to online-only models.

These closures have created opportunities for other retailers. For instance, one of the biggest retail lease transactions of 2021 was executed by Gravity Entertainment, an active entertainment business offering various dining and leisure options like bowling and e-karting. The enterprise took over the former Debenhams store in Wandsworth, south London, according to the report by Stansfield.

Meanwhile, the former Topshop flagship store on Oxford Street was bought by Swedish retailer IKEA for 378 million pounds (US$460,177,200) in October 2021.

Additionally, in Spring 2022, clothes retailer Uniqlo took over the 50,000-square-foot Superdry store on Regent Street, while the Superdry store moved into a smaller 30,000-square-foot space formerly occupied by Forever 21 on Oxford Street.

Because of a drop in footfall, high rental rates and online competition, retail stores on Oxford Street are reinventing themselves. For example, House of Fraser’s 318 Oxford Street store will be redeveloped at a cost of £100 million and six of its floors will be converted to office space.

Since upper floors typically do not get nearly as much footfall as lower floors, it makes sense to convert them into offices, according to both Stansfield and De Mello. “As office workers and companies look at space requirements again, a lot of them are looking to manage flexible coworking spaces rather than signing a 15-year-lease to the building,” explained Stansfield.

“Store owners are turning a decent chunk of their retail space into office space because there is a lack of supply in offices in the West End, so providing that space in a central location is definitely a good idea,” added De Mello. “On upper floors, the sale density is so low and the cost of being there is so high that they need to be more efficient, so by offering it to office tenants, they make a lot more money than they would by [selling] household or electronic items.”

In some cases, retail stores are also being turned into residential units. For example, high-end department store John Lewis is developing 10,000 homes for the build-to-rent sector in Bromley, Reading and Ealing over the next decade. The proposed sites in Bromley and West Ealing are above Waitrose grocery stores, which are owned by the John Lewis Partnership.

As for the rental units in Reading, they will be built on the site of a vacant John Lewis warehouse. Construction is expected to start in 2024, and rental units would be ready by 2027. The units will also offer shared spaces like gym facilities and roof gardens. Residents of the units can choose to have them fully furnished by John Lewis, a department store providing items such as homeware, fashion and electronic devices.

With these changes, John Lewis expects to make 40% of its profits from sources outside retail by 2030.

“If you look at supply and demand [in the real estate market], there’s a lack of residential units more than anything else, more than offices and retail, so that’s certainly an option too if you’re a department store,” added De Mello.

Converting the act of shopping into a sensory experience is also trending. As is the case in the United States, the experiential retail trend is also growing in the UK. Brands like Monopoly, Coca-Cola, Amazon and Microsoft are now opening stores that are experiential and “really showcase the brand”, according to De Mello. For instance, Dyson has opened a demo store on Oxford Street in London where customers can book an appointment for a professional wash and blow dry using Dyson hair tools. Stores such as Nike organise running groups, and other brands have live DJs in their stores.

“When your customer is in the store, you want to be sending the message that ‘this is what our brand stands for’ because you can’t get that online, you can’t provide the same experience,” explained De Mello.

There are now fewer people in the downtown core of London but they are shopping and dining closer to home. De Mello told LoopNet that affluent residential areas where there is also a selection of retail stores, restaurants and other amenities — like Marylebone and Chelsea — are doing particularly well.

“These are two areas where people live, so the spending didn’t drop as much. In fact, it’s probably gone up because people are socialising more,” he explained. “There is all that pent-up demand because people were not going out or socialising with their friends, and now they are. The places where people were going for work and where nobody lives, those are areas where we saw less footfall.”

Location is fundamental for most retailers, but it is even more crucial for smaller retailers in London, according to De Mello. “The main thing is to find out where their consumer is,” he explained. “It’s important to understand the demographics of that area and then work out ‘how can I benefit as much as possible from this location while minimising my rent?’”

King’s Road is doing particularly well, according to Stansfield. “It should continue its recent outperformance due to its higher preponderance of local shoppers and strong retail demand,” he wrote in the CoStar report.

Stansfield also told LoopNet that Battersea is “an up-and-coming part of London”. Retail space has been built as part of the mixed-use Battersea Power Station redevelopment, which opens its doors on October 14.

Crossrail and Elizabeth Line stations have opened in 2022, except for Bond Street station, which should open on October 24. Areas close to these stations should expect decent foot traffic, according to Stansfield.

Locations where there are other stores and competitors nearby can also be beneficial, added De Mello. “Retailers think that too much competition is a bad thing, but we’ve seen that competition isn’t a bad thing,’’ he said. “Normally, if you’re sitting next to your competitors, it’s in a location where there’s enough spend to go around, where you’ll do well.”

With people cooking more meals at home, the supermarket sector performed particularly well in the past few years. Discount grocery stores like Aldi and Lidl are growing, with the latter taking over a large 35,000-square-foot space in Enfield in 2021. Amazon also chose London to open its first physical Amazon Fresh stores in the UK; 19 stores have recently opened, including in Chalk Farm, Dalston, Angel, White City and Wembley. The stores use Amazon’s Just Walk Out technology, which allows customers to scan the QR code from their Amazon app, leave the store with their items and be charged on their Amazon accounts.

Since rents have dropped and grocery store chains have ambitious targets regarding store openings, smaller grocery stores could begin to locate in central parts of London over the next few years, according to De Mello. “That’s where I see the big growth in grocery, especially because there’s more and more residential being developed,” he observed.

The rise of these grocery operators is linked to growth among discount retailer in the UK, De Mello added. “There is also the rise of Poundland, Primark, and other similar shops that are providing discounted services because people’s budgets are squeezed and they need to economise somehow,” he said.

While London is its own market within the UK, a variety of issues are also at play across the country. For instance, Brexit brought additional import-export duties. On top of that, some fees are specific to the UK market, and they tend to pile up, which makes any retail endeavour costly.

“In the UK, there is a local corporation tax that is at 19%,” explained De Mello. In addition, most non-domestic properties have to pay a business rate tax, a specific property tax in the UK charged on most non-domestic properties such as shops, offices, factories or pubs.

According to De Mello, because of these factors, overall property costs can easily be higher than initially thought, since there is rent, rates and service charges relating to shopping centres to consider.

“It’s a big concern that business rates haven’t dropped, and landlords can only do so much, because they need to make money too,” added De Mello. “They can reduce rent, but if the government does not reduce business rates, it still makes the location unviable.”

As such, De Mello recommends hiring experts to help secure a retail lease. “Trading in London is messy, and it’s about getting the right team in place to maximise the potential of the location,” he said. De Mello recommends hiring a property agent to negotiate the deal and a solicitor to secure the lease on your behalf. Typically, landlords cover brokerage fees so tenants should not hesitate to engage an agent.

What’s next for retail in London? According to De Mello, with interest rates and energy bills recently going up, we haven’t seen the worst yet. “The rest of 2022 is probably not going to be great for retail but going into 2023 we should start seeing an uptick in demand,” he said.

As with most things in life, retail is cyclical. Time will tell how the London retail market will evolve, and where the next opportunity will be.