Christmas woes for retail landlords

A spike in Black Friday online shopping has contributed to the biggest drop in November footfall since the 2008 recession. Figures from data specialist Loqate show that the number of online transactions on Black Friday doubled on last year, with the majority of shoppers now opting to buy goods on their phones. This makes difficult reading for retail property landlords as we reach what is supposed to be the most wonderful time of the year. You’d better not cry Property owners are right to feel uneasy. Statistics  from Radius Data Exchange show that retail is going through a dramatic reconfiguration. A raft of company voluntary arrangements, store closures and administrations has shuttered a record 18 million sq ft of space this year – the worst environment since Woolworths collapsed in 2008. Supply and demand dictate that there is too much retail space on our high streets, and that many retailers are no longer fit for purpose. The negative occupier trends are already having an effect on the market. Shopping centre investment has experienced a record low in 2018, down some 75% from the halcyon days of 2013 to £1.3bn, according to Radius Data Exchange (see chart). The retail park sector, which has experienced years of positive new development growth, is finally slowing as vacancy rates in units begin to rise. Physical retail is clearly not the darling it once was. This year has been defined by the largest REITs readjusting their portfolio direction to suit these new dynamics. Hammerson is shedding its retail park assets, looking to raise £1.1bn to reinvest in prime destinations, and kicking the Brent Cross extension down the road. NewRiver is seeking to focus on sustainable market sectors, such as services, and move away from other sectors more exposed to the fragile retail market. Intu Properties revealed that it is working on plans to utilise some of its most valuable car parking land by repurposing spaces into PRS flats and hotels. The collapse of the intu takeover talks is perhaps the most striking indication of the instability in the industry, with the landlord’s share price plummeting 33% on the day the consortium behind the deal withdrew its bid. Research from CBRE released this week suggests that retail capital values have fallen by 5.3% in 2018 so far, the biggest decrease since May 2009 outside of the period immediately after the EU referendum. Future permutations are already being thought out, but what about the short term? Deck the halls How can landlords maximise the value of the assets they currently operate? Given the raft of CVAs this year, the tenant-landlord relationship has come under the microscope. Should property owners do more to relinquish power in the rental covenant to encourage short-termism? Sports Direct boss Mike Ashley, who has led his own personal charge to save the high street, suggested to MPs at Westminster’s Housing, Communities and Local Government Committee earlier this month that “landlords need to focus more on factoring in central overheads such as logistics and marketing costs, while considering a store’s profitability”. He argued that lease terms comprising a percentage of turnover with a base rent would create a win-win situation, but acknowledged they were “not something most landlords like”. Radius Data Exchange shows that the average length of leases signed by retailers has been tumbling, down 17% in five years to 7.4 years (see chart). Retailers need and crave flexibility – so why not give it to them? And we need to take into account those retailers that are stuck in long-term leases. ’Tis the season to be jolly! It’s not all about the shops themselves, however. The mantra “build it and they will come” should no longer be taken as gospel. The startling footfall figures show that consumers are staying away. This week, John Lewis Partnership said that takings are down on the equivalent period last year, and the year before that. Even this stalwart of the high street is struggling to pull in the punters. Spending culture has changed immeasurably, of course. Going back 10 years, online spend was less than 5% and the iPhone had just celebrated its one-year anniversary. The long-term effects of the rise of e-commerce have led to huge infrastructural changes to physical property, particularly retail stores. The looming spectre of Brexit and the multitude of unanswered questions and unknowns all add to the unease in the market. The toughest challenge for landlords will be to collaborate with one another to create more interesting and innovative offers, especially on the high street. That will encourage higher footfall. It’s no secret that high, upward-only rental covenants, combined with excessive business rates, have created problematic trading conditions for retailers. Why don’t landlords move to address this before they have to deal with the thorny issue of empty shops? The continued use of the CVA has come under additional levels of scrutiny from landlords unhappy that they are being used as an insolvency blanket instead of an emergency helpline. But in order to avoid such a scenario, should landlords be more proactive in protecting their tenants from the outset? Come on guys – embrace the Christmas spirit and think about some inclusive new year’s resolutions. James Child is retail and industrial analyst at EG To send feedback, e-mail james.child@egi.co.uk or tweet @JamesChildEG or @estatesgazette