Aviva mulls retail to resi conversion

Investor looks to redevelop retail parks with residential

Aviva is looking to redevelop retail parks, especially in London, with high-density residential schemes in a bid to boost returns and meet the housing crisis. The firm’s head of research Jonathan Bayfield has issued a research paper making the case for redevelopment.

“With UK retail parks facing an increasingly perilous future, turning the sites into vibrant residential-led developments offers land owners an opportunity to bolster investment returns,” he said.
The pressures on UK retailers are intensifying as they are hit by rising costs, sluggish consumer spending and ever-expanding online sales. Since the turn of the year, Toys “R” Us, Maplin and Poundworld have gone into administration while others, including House of Fraser, Debenhams, Carpetright and Marks & Spencer, have closed stores.

While the majority of these brands’ outlets are primarily located in town centres, it would be wrong to conclude retailers’ woes are confined to the high street. The same forces are depressing the profitability of stores located in out-of-town retail parks. More and more retailers have found themselves trading from stores that are suddenly far too big for their needs.

As the owner of a number of these sites in outer London boroughs, Aviva is talking to various tenants with a view to redeveloping the land. Bayfield explained: “In working closely with our retail clients, our objective is to help them cut their rental liabilities by converting their existing outlets into smaller formats that are more appropriate for today’s retail environment. The aim is to boost sales densities and improve the profitability of their operations.

“By building a sizeable number of residential units on each of these sites – a large percentage of which will be genuinely ‘affordable’ – such developments can simultaneously help to meet London’s ambitious new housing targets.

“From our perspective, although well-let, well-located schemes should continue to deliver decent returns, investing in many retail parks now carries increasing risk. With retailers unwilling to take out leases of more than ten years, and in many cases longer than five – compared with the 25-year leases most parks were designed for – downward pressure on rental income looks inexorable.

“By repositioning such sites, there is an opportunity to at least mitigate some of this downside risk and deliver investment returns that are sustainable over the long term,” he concluded.

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