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Shopping centres in crisis over rents

Shopping centres, already hit by declining footfall and changing consumer habits, are facing further challenges as “unprecedented deals” are being made on rents.

The rise in retail administrations, company voluntary arrangements (CVAs) and retail downsizing has left many shopping centre landlords facing empty units and tough negotiations with retailers. House of Fraser is closing at least 13 stores in the new year after landlords walked away from Mike Ashley’s offer to pay business rates but no rent for some ailing House of Fraser units. Meanwhile Debenhams is seeking to cut 50 underperforming stores, New Look is shutting 85 and Marks & Spencer will close more than 100 shops across the UK.

Earlier this month, British Land reported that CVAs and administrations had cost it £14.7m over the last 18 months.

“There’s no stigma in CVAs any more – everybody’s doing it,” said one retail letting agent. “They’re being used to get rid of low-performing stores, not to help businesses on the verge of bankruptcy.”

Andrew Jones, chief executive at property firm London Metric, is certain the trend will continue in 2019: “We’ll see the ongoing destruction of value of retail space where the strong retailers will get unprecedented deals off the back of closures.”

He added that landlords and investors should have seen the situation coming. “[The retailers] are all tied in to really long leases that they signed before the financial crash and before online shopping really took hold. It doesn’t make sense any more.”

Jonathan De Mello, head of retail consultancy at property advisers Harper Dennis Hobbs, said the way shopping centre businesses are valued is out of sync with best practice in the current climate: “Investors need to face the challenges of retailers with rent changes and break clauses that benefit the stores and the landlords, but they don’t want to do it because they don’t want the valuation to go down.”

Intu, which owns 14 UK shopping centres, has had two deadline extensions to its possible sale as it struggles to reach a deal. Its 2018 rental income is expected to grow between just 0% and 1%. Further to the problem, Springboard has reported 19 consecutive months of footfall decline for UK shopping centres across the board.

Mark Williams, president of commercial property body Revo, said changes were needed to create mixed-use spaces that better meet the needs of towns: “The main challenge is retail is having a cyclical downturn and structural headwinds that mean shopping centres are having to shrink and think about what to do with the space. We’re seeing a lot more mixed-use conversion to residential, co-working space and leisure. These things take time and money though.”

He added that the competition from online is forcing shopping centres, and town centres, to offer more: “In 10 to 20 years we’re going to see much nicer town centres as they regenerate. Before, people didn’t have a choice but now, with online, they do.”

Graham Phillips, partner at retail property agency Morgan Williams, agreed: “Supply is outstripping demand and it’s making letting retail space very difficult. I don’t think it’s going to be any easier in the next six months, even if it’s a good Christmas. If you’re a landlord, you can’t just sit there and wait for it to blow over. This is a more significant, structural problem.”

Although significant changes are needed, De Mello feels positive about the industry’s ability to make them: “Shopping centres are generally quite resilient because they can asset manage better. They can move quicker than the high street where you have multiple ownership, but they’re not responding as quickly as they should. Landlords tend to be the last to the party – they follow the retailers in terms of investing in tech and experience.”

 

The Drapers verdict

Shopping centres are facing many of the same difficulties with footfall and store closures as the high street, but landlords have a greater opportunity to rethink and re-plan the shopping experience within their developments. They need to think long term to ensure they compete with other shopping destinations as retailers shrink their portfolio of stores.

As online continues to take a larger share of spend, traditional fashion retail is not going to drive growth in shopping centres. Owners need to look to new types of tenants, whether that is offices, pop-up spaces or entertainment and experiences to drive footfall. This will offer something that shoppers cannot find online, and increase footfall for remaining fashion stores.

As tough trading continues to bite across the retail landscape, more flexible tenancies are essential to attract new tenants and alleviate pressure.

Readers' comments (2)

  • Land Lords have to accept that rents are going to fall or they face empty units. INTU are very difficult and I agree with Mike Ashley, he is standing up for retailers.

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  • The solution is performance related rentals. Landlords must select tenants more carefully and then show confidence in their choices and the strength of their centres - turnover based rentals. Sounds radical, but a radical solution is required to fill empty spaces and reverse the downward spiral in performance and perception.... before irreversible damage is done. Oh, and no special rate deals for the big boys. Its allowing mediocrity to flood the retail space.

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