Ann Stewart: Flexibility is the key to dealing with changing needs

Digital and technology-led disruptors are revolutionising the way we live. Real estate, like so many sectors, is having to adapt to meet the needs of a rapidly evolving digital economy and the changing needs of consumers, occupiers and owners.

Ann Stewart is a property and real estate adviser, Shepherd and Wedderburn LLP

Some sub-sectors are performing surprisingly well, while others are struggling to survive as their relevance wanes. Tastes and needs change rapidly and often.

The UK retail sector has been hit by a perfect storm of political, economic and consumer uncertainty, an onerous rates system, rising costs and the longer-term trend of rent increases, while trying to remain competitive in the fast-growing digital marketplace.

Combined, these elements are hammering the high street, characterised by store closures, job losses and failing businesses: around 125 retailers collapsed in 2018, and administrations in the first quarter of 2019 rose to a five-year high, up almost 27 per cent year on year.

Increasingly, retail is more about personal preference than a place to go. Beyond the convenience and needs-based outlets, there is growing evidence consumers are seeking a shopping ‘experience’ beyond trawling rails or shelves.

Online shopping can provide that type of contact far more efficiently, and despite continuing high-profile retail failures, the sector has been slow to deliver the revolution required to secure its future, and embrace ‘experiential retail’. This requires more than a nod to the latest buzzwords. Innovative and creative transformation is needed.

Although not immune to economic challenges, the leisure sector has demonstrated considerable success in addressing consumer appetite for experience, catering for the increasing enthusiasm for recreational activities with creative uses of place to provide people with truly experiential destinations.

Casual dining operators able to offer something different are showing resilience in a fiercely competitive market, while casualties in this sector appear to have suffered from excessively rapid growth and poor locations. Changing dining habits affect this sector, with the growth in restaurant-to-home delivery services meaning people don’t need to go out for a fine dining experience.

Build to rent (BTR) is emerging as a new asset class, and a rapidly growing one given Britain’s chronic housing shortage.

For ‘Generation Rent’, owning a home is no longer a given, or an expectation, and the availability of quality rental accommodation is a compelling proposition that also appeals to institutional investors and Westminster and Holyrood politicians.

The University of York’s Centre for Housing Policy estimates that by 2040, up to one-third of 60-year-olds will be private renters.

The legal framework for a BTR letting model is different in Scotland, where private residential tenancies can no longer have a fixed duration, giving tenants greater security of tenure. A growing number of large-scale institutional investors are, however, comfortable with the modern Scottish approach. There are also signals that the rest of the UK might follow Scotland’s lead.

The office sector continues to perform well, particularly in the major cities, with occupier demand remaining strong, supported by modest growth in the service sector. A factor contributing to the sector’s resilience is the willingness of providers to cater for the growing number of employers now offering flexible and agile working. ‘Space as a service’ underpins this approach, which allows occupiers to take on bespoke space and services that best suit their requirements, with flexibility to expand or contract according to their needs.

Formerly the ugly duckling of real estate, sheds, now re-branded as logistics warehouses, have emerged as a darling of the market. Obvious examples are distribution centres with the pivotal role they play in the supply chain, and demand is outstripping supply. Warehouse space is at a premium as online sales grow – from 2.5 per cent of total retail sales in late 2006 to 17.6 per cent in April 2019. Businesses continue to stockpile for Brexit.

The common strand running through those sectors weathering the storms of online competition, lack of consumer confidence, economic constraints, and ever-present uncertainty, is the ability to adapt swiftly. Real estate sectors have a tendency to operate within their own silos and yet, for those who are struggling, there are plenty of success stories from other sectors to help them make their assets desirable to owners, occupiers and investors alike.

These themes and more will be discussed in detail at Property2019, a free half-day event at the EICC on 11 June: https://www.property2019.com/

Ann Stewart is a property and real estate adviser, Shepherd and Wedderburn LLP