WeWork in talks with UK retailers about stores opportunities

By Paul Norman - Thursday, January 11, 2018 15:32

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WeWork, the co-working space provider, is talking to UK retailers looking to scale back portfolios about opportunities to take on surplus space as it continues its remarkable global expansion drive.

Details of the talks, which echo recent tie ups the group has agreed with major department stores in North America, emerged this morning at JLL’s annual year ahead predictions breakfast at the Rosewood hotel in London’s Midtown.

Patrick Nelson, WeWork’s European real estate head, took part in a panel debate on key themes hosted by the BBC’s Business Editor Simon Jack and also including Alistair Meadows, head of UK capital markets, JLL, Sue Asprey Price, lead director in corporate solutions, JLL, Helen Gordon, CEO, Grainger and Phil Redding, chief investment officer, SEGRO.

Responding to an audience question focused on a Centre for Retail Research reported that predicted 22% of retail stock or 60,000 shops would be vacated by 2018 thanks to structural changes in the sector, Nelson said WeWork’s rapid expansion would be part of the solution for repurposing this space.

“We are talking to retailers that are looking to downsize their footprints about how we could perhaps take the higher space.”

Nelson highlighted his admiration of AppearHere, the so-called “Airbnb for retail”, and pointed to WeWork’s recent tie up with US group Hudson’s Bay to take on some of its surplus retail as a likely template.

At the end of last year department store chain Lord & Taylor's parent company Hudson's Bay announced a deal to sell its flagship New York City Fifth Avenue store to WeWork for $850m. WeWork is converting most of the building to be its headquarters on the top floors while Lord & Taylor will lease a scaled-down department store across the bottom three floors over 150,000 sq ft.

The two companies have also completed similar deals in Toronto, Vancouver and Frankfurt.

Nelson also reaffirmed WeWork’s commitment to bringing its WeLive co-living concept, which is up and running in New York and Washington, to London.

Responding to Jack’s suggestion that WeWork’s business model was based on a “buy long, sell short” position that was as such inherently exposed to economic downturns, Nelson explained that the model was protected by the diversity of the offer.

Nelson said large corporates often came to WeWork first via the real estate platform and the flexibility on offer but that they remained occupiers because of the range of other services WeWork provides as part of the package, including the ability to use WeWork space across the globe.

Nelson said that the focus in all of its initiatives was evolving its product to “address the point - what do people really need”.

JLL is forecasting investment volumes in the UK property market in 2018 will total around £55bn, with returns of 6.4%, slightly down on the £60bn investment volumes and 10% returns the firm now expects for 2017.

JLL cited the impact of the removal of the capital gains tax exemption for overseas investors in UK commercial property as a temporary blow to the market but suggested that the new regime will not deter investors in the long term. JLL also predicts that the UK, and London in particular, is likely to be a key destination for Japanese and Korean capital.

Chris Ireland, UK chief executive, began the event with an upbeat address pointing out that 2017 had surprised on the upside across UK property markets and said he was already more positive about 2018 than he had been two to three months ago.

JLL’s Alistair Meadows said the introduction of capital gains tax for overseas buyers in the recent Budget had caused some deals over Christmas to be reviewed and renegotiated but investor appetite remained strong for the UK. “Our feeling is it places the UK on a level or par with France and Germany.”

Focusing on the WeWork model and how investors were pricing it into deals, Meadows said there had been a shift in the market in 2017 that meant investors were increasingly comfortable with the model and confident that it has longevity.

“There was £1bn of transactions where WeWork was 50% or more of the building. The mindset is changing” Meadows said but added that there had been a price differential of 25 to 50 bps.

Phil Redding of SEGRO said the standout circa 20% returns logistics had enjoyed in 2017 may not be repeated but it would still be a strong year because of the fundamentals.

“On top of the strong demand created by ecommerce and the internet – as my CEO says the internet trumps Brexit – on the supply side there has not been a huge speculative response so we expect good performance.”

Asprey Price said there had been no signs of mass exodus because of Brexit so far and WeWork’s Nelson agreed that London’s ability to attract talent would likely see it remain ahead of other competitor locations as an office location whatever Brexit emerged.

Helen Gordon of Grainger added a note of caution saying that Brexit may contribute to rising construction costs and a skills shortage and this would mean some schemes would simply not be developed over the next five years that would have been otherwise.

Jon Neale, Head of UK Research, JLL, said: “Undoubtedly there will be investors who are dissuaded by the capital gains tax changes, but the change only aligns the UK with most other developed countries. In spite of this, the major reasons for investing in UK property remain – liquidity, lot sizes, landlord-favourable leases, the strong economic and leasing fundamentals, and at present, relatively high yields and a weak currency.

“We also expect Korean investors to add weight to the broader push from Asia this year. While they have held back from adding to their UK exposure in the aftermath of the referendum, we expect a return in 2018, attracted by the market’s resilient performance and high pricing in other global markets.”

JLL’s property predictions for 2018 also include the "sustained and resilient performance of the industrial and logistics sector and a continuation of the boom in deals for flexible office providers as more corporates take space".

It added: "While proptech will continue to transform the industry, JLL highlights digital construction as one area that could have more dramatic impacts over the next few years."

Following a number of recent landmark deals, JLL forecasts that 2018 will see wider participation by institutions and pension funds in the alternative sectors.

Appetite is being driven by a mix of long income opportunities linked to inflation, exposure to strong demographic trends and a number of sectors which benefit from a structural supply and demand imbalance. There will be a rise of mixed-use alternatives as investors and operators will increasingly regard themselves as providers of living space and social infrastructure. The shortage of supply will result in established operators in one sector moving into a similar or complementary market.

Finally, amid continued political uncertainty, 2018 will be the year in which many companies finally make decisions about their business strategies post-Brexit, according to JLL. Nevertheless, it said GDP growth looks set to be around 1.5% in 2018, roughly in line with 2017 and well ahead of some of the more pessimistic forecasts produced at the time of the referendum.

Neale added: “A deal with the European Union, even if it only covers transition, is likely to emerge towards the end of the year, but this means that this will be another year of Brexit uncertainty, with many in property still unable to make informed decisions. But in spite of this mood music, inflation will fall back, base rates will remain unchanged and employment growth will be solid, suggesting that the economy will grow at roughly the same rate as in 2016.”

JLL surveyed nearly 400 guests at its predictions event held at The Rosewood Hotel in London where they were asked what they expect returns in the UK property market to be in 2018. Approximately 60% of respondents said 4-8%; in line with JLL’s own 6.4% prediction. Attendees were also asked what they expect their level of investment in business or property to be by 2021, with 46% saying somewhat larger than levels seen today.

To read JLL UK’s property predictions 2018 report, click here.

pnorman@costar.co.uk

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