Should Cherwell District Council be Risking Public Money Buying Shopping Centres?
As I said in the recent election debate on the BBC, in my opinion they shouldn’t.
There are many reasons it’s a bad idea, both from a business perspective and as part of local spending priorities.
I’ve worked in retail nearly all my life. I built and ran a national chain of jewellery stores across the country and traded in several shopping centres, including some of the most prestigious in the country such as Bluewater in Kent and the new Bullring Centre in Birmingham. I write a regular column for Retail week Magazine and comment regularly in the national press on retail issues as well as offering consultancy services. One of my main focusses is independent retail and commercial property. So I know a little bit about what I’m talking about.
Cherwell District Council (CDC) leader Barry Wood claims that buying the Castle Quay Shopping Centre in Banbury is a good deal for the people of Cherwell. This decision was also backed by the Labour group on the council and their leader Sean Woodcock has assured me there’s a good business case for doing it. Unfortunately neither of them have been able to show it to me so far.
Their belief is that buying a commercial property like a shopping centre is a good idea as property will always rise in value. This may be the case for domestic property and some kinds of commercial premises, but not always with retail space.
A Good Investment?
The argument for buying the scheme seems to be that if they hadn’t, the centre would have shut down. It has many long term empty units and is generally struggling to compete in an ever crowded marketplace. The council’s decision a few years ago to allow a new shopping park to open on the outskirts of Banbury haven’t helped its plight.
It’s extremely unlikely though that it would have closed down. Much more likely that it would have been offloaded by its pension investment owners to another investment company with more experience of running a shopping centre than some local councillors.
Moreover, if the argument is that the centre was about to collapse, that doesn’t exactly make it an attractive investment for public money does it?
There have been some shopping centre failures in the past, but they are few and far between. But when they do go, they tend to go completely. That means an almost total loss for anyone unlucky enough to be the owner at the time. There will be some residual value in the land, but that’s unlikely to reflect the full price paid for the whole development.
There have been a growing number of retail failures in recent years with 650 collapses so far this year alone, and we’re not even half way through yet! Some of them very high profile and heavily leveraged operations. Others are busy negotiating partial closures and rent reductions with their landlords. Others are moving more into the online arena and abandoning physical retail space almost altogether.
None of this bodes well for an under-let, under-invested and down at heel shopping centre in a struggling town in North Oxfordshire.
So essentially CDC are gambling with public money against the odds. And it doesn’t end there.
According to Barry Wood the scheme is turning a profit at the moment, but as I’ve said previously, I’ve not seen evidence of that. I have seen a large number of long term voids in the centre, and with the potential for these to increase in number I fear the profitability may be marginal or likely to decline.
There will also be ongoing running costs for the centre and presumably additional investment to do whatever it is with the place that they feel will revitalise it. Again details on that are sketchy, but I think there’s some talk about dividing the larger units into smaller ones to attract independent retailers. Whilst I support that idea to some extent there are a lot of things to consider about that course of action.
Firstly the cost of doing the work, which may include major re-modelling of the units due to, amongst other things, fire regulations. I’ve seen at least one shopping centre management come unstuck with similar plans due to rules on access to fire exit routes.
Helping Smaller Retailers?
Secondly smaller independents usually don’t have a huge budget for shopfitting, so there will be additional cost in partially fitting out the units, including new shopfronts etc to attract smaller operators and to ensure that their stores fit in with a modern shopping centre scheme.
Thirdly there’s the loss of business rates on the empty units that are there now, and will most likely be there for a while. Considering the current climate in retail there’s also a good chance that voids could increase. At the moment the landlords will be paying rates on those premises even though they’re empty and a good deal of that money goes to CDC. With the council now being the landlords, they’re going to be paying the rates to themselves, effectively wiping out that income.
Devaluation of the Asset
Finally there’s the issue of valuation. Shopping developments are broadly valued on their rental potential. This is why landlords will leave units empty rather than let them out at a reduced rent. If the council’s plan is to lower the rent for smaller or other retailers, that will have a knock on effect on the value of those units and then on others when rent reviews come around. Other tenants now paying a higher rent will also push for a reduction when their leases come up for renewal or rent reviews are due or maybe even before.
The net effect of this would be to push down rents, not only in the centre but across the town, reducing loan to asset values across the board. In broad terms I’d welcome that. I’ve long argued that retail property values are hugely inflated. But in terms of the Council’s investment exposure in Castle Quay it’s a potentially dangerous situation, not only leading to a potential devaluation of the asset, but also any loans secured on it being partially called in.
There may be some balancing in terms of appreciation on the total asset value, but in the current climate and in a falling retail market, there a very good chance that the overall value of the scheme will fall relative to the amount the council has sunk into it, both as an initial investment and any further day to day expenditure.
All of this appears to have passed Cherwell Councillors and the leaders of Labour and the Conservatives by. They obviously have a very patchy understanding of how retail property works and the implications and pitfalls they are letting us all as council tax payers in for.
Moreover there’s the question of if so much money should be focussed in the north of the district while ignoring other areas. Mr Wood commented in the Radio debate on Wednesday that he recognised that there were empty units in Pioneer Square in Bicester and that it was difficult to get them filled. Yet this doesn’t seem to have concerned him over the purchase of Castle Quay. Indeed, having set the precedent in Banbury I asked him during the debate if the council intended to buy Pioneer Square as well. He didn’t reply.
A more sensible and prudent approach to the problems in both areas would be to work with the landlords rather than bailing them out with public money. Leave them with the risk whilst introducing local initiatives that help smaller retailers get a foothold and would also support the centre.
These could include rates reductions, which Barry Wood dismissed out of hand when I challenged him on it during the election debate. Neither he nor Sean Woodcock appeared to know that it has been within the gift of local councils to reduce rates on specific properties at their discretion for several years now.
If they wanted to provide smaller, more affordable space for independent retailers, they could lease units from the centres on a medium to long term basis, probably negotiating favourable terms with the landlords as a council will have a very good covenant. These could then be divided up (if required) and then sublet on flexible terms on reduced rents to retailers, although this would have to be agreed beforehand with the landlord for the same reasons discussed above concerning rental levels and valuations.
This would achieve the same aim of revitalising schemes both in Banbury and Bicester and would not involve the council in risking large amounts of public money. It would also mean that the bulk of the £60m they are now tying up in one area could be spread across the district.
This is the kind of strategic thinking we need, rather that the amateurish speculation of a council who seems to want to play at being shopkeepers with our money. This is why we need a more diverse representation on the council and councillors like me who will challenge these misguided moves before millions of pounds of desperately needed council funds are put at risk.