The St James shopping centre that TIAA Henderson Real Estate is developing in the Scottish capital Edinburgh offers a ‘rare’ opportunity to invest in a large retail-led mixed-use project in the UK in the middle of a ‘unique’ heritage site, according to Martin Perry, director of development.

The St James shopping centre that TIAA Henderson Real Estate is developing in the Scottish capital Edinburgh offers a ‘rare’ opportunity to invest in a large retail-led mixed-use project in the UK in the middle of a ‘unique’ heritage site, according to Martin Perry, director of development.

‘In Netherlands and Scandinavia you may see schemes that link to each other but we don’t have many over here that do this as well. This is actually a mall galleria that links to the rest of the city’s retail circuit.’

The shopping centre site is directly overlooked by Edinburgh Castle so there were a lot of additional aspects to be taken into consideration that would not otherwise have been there, Perry explained. ‘The heritage aspects came on top of the normal issues you have to work with on any large-scale development project. We worked closely with the City of Edinburgh and other stakeholders to create a policy for it, a planning guidance before it could be put forward for scrutiny.’

With an estimated value of over £850 mln (€1.07 bn), the St James project will create 1 million sq ft (92,900 m2) of retail space, a luxury hotel and up to 250 new homes. Currently The mixed-use project is being developed under the umbrella of TIAA Henderson Real Estate’s UK retail Shopping Centre fund which was recently extended for another 10 years.

TH Real Estate’s UK retail fund has a 100% stake in the project, but it is seeking partners to share the development costs. Existing investors in the fund have the first right of refusal, but the prospectus will also go out to the market, Perry added.

JOINT VENTURE
UK and global investors are in the running for a portion of development. The fund manager will be fluid in terms of the structure of additional investment, he noted. ‘It could be with one of our existing investors in the form of a joint venture or a separate fund.’

A marketing campaign for the pre-letting of the retail space is meanwhile under way, Perry said. The project was showcased at the inaugural MIPIM UK fair held in London in mid-October, and will also be spotlighted at the upcoming Mapic fair in Cannes in November. ‘We’ve just started to get going,’ he added. ‘The momentum will get going by Mapic and it will work its way through to Mipim.’

TH Real Estate’s predecessor company Henderson Global Investors purchased the development opportunity in 2006 for its UK retail fund. It subsequently took another three to four years to get the development through the city planning procedures. Given that the site is a world heritage area, bodies such as Historic Scotland and Edinburgh World Heritage were required to scrutinize the proposals as well as the local council and statutory bodies including the Scottish government.

DEVELOPMENT RISK
While a project of this scale ‘inevitably’ contains an element of risk, Perry believes the site lends itself to its new multifunctional role. ‘Edinburgh is the only top 10 UK city without a major shopping centre and that is one of the reasons why it has dropped recently in the rankings. It is heavily constrained by its heritage and old buildings. The site is very expensive and it takes twice the amount of work to revamp the area because of the heritage buildings which are not the most efficient either because the shape of the spaces are often not uniform. But by their very nature, those heritage buildings are what make the site so very attractive.’

Happily for TH Real Estate, appetite for retail investment has picked up again in the past two years and attitudes towards pooled vehicles are also mellowing. In 2010, when the fund manager was thinking out the investment structuring, the market was looking worse for wear, Perry noted. It was also harder to agree a fund extension during a recession, he added. ‘At the time, the market was pulling away from pooled investment vehicles. It was quite tricky talking to investors who had been burned in the recession after being exposed to risks like development and that slowed the project down. But now we have rebooted and are moving forward confidently.’

As a result of the crisis, the supply-demand dynamics have also changed. No new shopping centres have been built in the UK in the past few years and only one shopping centre opened in 2012 - Land Securities’ Trinity Leeds project. ‘We are regrouping at a time when the appetite has changed and yields have come in,’ Perry conceded. ‘We are hoping to start on the site next year. By June or July, we need to have the investment structure in place, as well as the site assembly specs and the tender for the main construction contractor.’

The marketing of the retail project has another dimension thanks to its location in the heart of the city centre under the Edinburgh Castle, Perry said. ‘We are not selling the Shopping Centre the way you normally do with this kind of development project. We are actually selling the city and the whole package that is Edinburgh.’

PUNCHING ABOVE ITS WEIGHT
Edinburgh already punches above its weight thanks to its international reputation, but the new shopping centre development will enhance its value as a tourist destination even further, Perry predicted. The centre offers the best views of the castle, he pointed out. ‘We’re promoting Edinburgh, the castle, the history, the tradition of story telling. And then there’s the retail with well-known global quality brands.’

Thanks to direct flights to the Scottish city, Edinburgh is attracting a growing number of international tourists, also from Asia, Perry noted. ‘A lot of people are attracted to the fact it is not London, but that it has a smaller environment and is not so overwhelming. This year, there was a 12.5% increase in visitors to the Edinburgh festival and the city is laying on more events all the time. A number of festivals are linked together; first you have the Edinburgh Tattoo, then the Fringe Festival and then the International Festival. In the run-up to the festivals, hotels can hit high occupancy levels due to all the people who have come to Edinburgh to support the festival set up.’

Outside the festival season, Perry sees opportunities for conference organizers to capitalize on the available bed spaces. ‘I think this project will lead to an even greater increase in tourism.’