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Retail rents: the race to the bottom

News analysis 23 august

Retailers are demanding rent cuts in the wake of an avalanche of company voluntary arrangements. But the long-term effect may be to undermine investment in retail property.

Retailers are demanding rent cuts on stores and landlords are spilling red ink across their retail portfolios as values plummet.

This summer Arcadia Group, Monsoon Accessorize and Debenhams all launched company voluntary arrangements, closing shops and slashing rents across the high street. In the wake of the fallout, other retailers including ClarksPrimark, River Island, Jack Wills and Schuh, are also looking for rent reductions to balance out the playing field.

Last week, Drapers revealed that River Island wants to slash rents by up to 40% across most of its portfolio and is understood to be negotiating turnover-rent deals of up to 12% for its stores in marginal locations. Meanwhile, Jack Wills’ new owner, Sports Direct, is asking landlords to accept rent-free tenancy agreements on some of its worst-performing stores. It is offering landlords 5% of turnover on most of its 100 stores and has reportedly closed eight shops.

The sheer volume of rent reductions and store closures has left many landlords scrabbling to avoid swathes of empty units appearing across their estates.

One property agent told Drapers that the shift is more than simply cyclical change in the market: “Retail changed from being a landlords’ market to one where the tenant has the power. There are still some areas, such as Bond Street, which are strong, but elsewhere the tenants are in a better position to negotiate on their leases.”

The system is geared towards those who fail. It’s bonkers

Chair of a fashion chain

The chair of one fashion chain said the slew of CVAs is punishing healthy retailers: “The stark facts are that you can only do a CVA if you are insolvent or heading for insolvency unless you get the CVA across the line. Theoretically you could drive your business into the ground to get the rent cuts, but nine times out of 10 the issues [that lead to CVAs] aren’t related to rent – they’re because of lack of good product, or positioning.

“It’s very irritating that the more successful you are [as a retailer], the more you are compensating those who ran their businesses poorly. The system is geared towards those who fail. It’s bonkers.”

Political fix

While admitting CVAs are causing “chaos”, one retail managing director defended those seeking rents cuts, as the government is doing little to help the high street: “Retail is being destroyed by Brexit and bad politics, and it is a vicious cycle. It’s impossible to get noticed on the political agenda.

“The latest attempt by retailers to discuss business rates has been ignored. Retailers have to attack what they can and that unfortunately is rents.”

Lease terms are set to change as retailers renegotiate rents, despite having long lease commitments left to run.

Fashion retailers really want a turnover rent that reflects their income – not what someone else can pay

Fashion retailer

One London-focused retail agent told Drapers: “If you have a lease renewal in the next year, you are in a strong position to say you want reduced rent. Some retailers have gone to landlords to say: ‘In two years, we’re off. Do you want to give us a rent-free period or lower the rent now?’ Landlords may see a potential void as unwelcome and look closely at whether they want their tenant to stay.”

Change is now inevitable, and many expect the key shift in the relationship between landlords and retailers to lead to turnover-based rents. Some retailers think this could level the playing field.

“Fashion retailers really want a turnover rent that reflects their income – not what someone else can pay. That’s where the shift will come,” one retailer said.

Jack wills and mike ashley

Mike Ashley is negotiating with landlords of Jack Wills stores, and has already closed eight

“Some brands don’t care about the rent they pay, as it’s a marketing space, and that sets the pace with rents for the centre. They could be Rolls-Royce or BMW or even Lego, which is a different equation to, say, a Superdry, which is looking to make money from those stores.

“We’ve had a tough few years in retailing and some [retailers] went into stores they could afford when they were trading better but now can’t.

“Other retailers have built up debt, which has led to them being unable to afford the rent they previously could because they expanded too aggressively.”

Turned over

Long term, however, some retailers may pay more through turnover rents if they are trading successfully.

One property agent said: “The irony is that if you gave H&M a turnover rent deal, it may be more than the actual estimated rental value. Turnover rents don’t answer the question of what rents should be, but it changes the basis of how to charge rent.”

Turnover rents also pose a particular problem for fashion, which is seeing more sales move online.

One senior property agent told Drapers: “In the dominant centres you’ll see turnover [based-leases], but fashion shopping is going online, and landlords don’t want to get tied into turnover leases when they don’t get a share of the sales that are internet driven.

“I think turnover rents will be far less than market values, but that’s what landlords will have to face.”

Fashion shopping is going online, and landlords don’t want to get tied into turnover leases

Property agent

Whether landlords have the resources to handle a huge drop in rental levels is a different matter. 

Some larger landlords have slashed the value of their retail holdings, among them British Land, which downgraded the value of its retail holdings by 11.1% in May.

Hammerson’s share price has fallen from a post-recession high of 700.5p in February 2015 to 205.1p this week. 

Intu is similarly under pressure: a “wave” of CVAs led net rental incomes to fall by 7.7% to £205.2m in the six months to 30 June. 

Screenshot 2019 08 20 at 10.00.17

Source: London Stock Exchange

Hamerson’s share price 

One retail property agent believes the big landlords will survive the retail woes, but smaller operators may be squeezed: “Some of the bigger regionally dominant shopping centres will be fine, but the smaller purely service-related centres will have issues.

“If they lose a Debenhams or a House of Fraser, then they may really struggle. The next question will be what comes in to fill that space.”

Another agent said landlords may simply cut their exposure to retail and concentrate on other sectors to find returns: “Landlords are moving towards leisure and away from retail risk. We need to see an end to the CVA process, as it is creating more problems.”

The avalanche of high street CVAs shows no sign of slowing down, and retailers appear to be gaining critical mass in forcing downward pressure on rents. However, what may seem like a correction in the retailer-landlord dynamic could lead to a longer-term erosion of investment in the high street.

The Drapers Verdict

The sheer volume of CVAs introduced in 2019 means that for many retailers, understanding whether they are paying a fair rent in relation to their peers is nigh on impossible. While landlords cut their losses, in the long-term retail may find itself losing out as investment in property dries up.

Changing the rental terms could be the only viable option that keeps the relationship healthy enough to avoid either store closures continuing or landlords simply selling up.

There is no doubt that the high street will change and whoever forms the winning combination could steal a march over rivals in the coming months and years.

Readers' comments (1)

  • darren hoggett

    Landlords are often seen as the villains, but they do not run the businesses that frequent their premises. Retailers always have a choice, but I am mystified by their level of self entitlement. They insist in staying in prime sites that they increasingly cannot afford to be in - in a terminally declining industry with diminishing returns.

    Surely the answer would be to downsize their efforts and move to cheaper locations where the figures might add up?

    However the future for the majority of physical retail is one that requires a stiff drink with a bucket of cold water and a long, hard look in the mirror.

    Unsuitable or offensive? Report this comment

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