Amid Eviction Moratorium, Wiggle Room Tightens for Retail Landlords & Tenants in the UK

Land Securities, a Giant UK REIT, announced that it would try to sell a large portion of its properties. No buyers identified yet.

By Nick Corbishley, for WOLF STREET:

Land Securities (Landsec), one of the UK’s largest REITs, has unveiled plans to sell of up to a third of its £12.8 billion portfolio in a huge shift away from the retail market. It has not yet identified buyers. Besides its retail properties, LandSec owns a vast portfolio of London offices and specialist assets consisting of hotel, leisure and other properties. Those specialist assets, together with its retail properties, represent around half of the portfolio’s total valuation. But some of them are now on the chopping block.

Landsec says it will sell some properties to “crystallise significant value already created” and invest in new projects in London, including offices, whose occupancy levels have also been hit hard by the virus crisis. London, it says, remains “one of the world’s gateway cities” and central London assets, which already represent 64% of its portfolio, are “a good source of liquidity over time, with clear potential to recycle capital out of some assets and reinvest into new growth opportunities.”

At the end of September, when rents for the final quarter of 2020 came due, retail tenants paid only 13% of rent due for the fourth quarter, worse than at the shortfall on rent-due date at the end of June, according to the UK’s National Law Review. This added £2 billion to the pile of unpaid rents.

Foot traffic remains down almost a third compared to a year ago, with large cities hit hardest. And it keeps on falling, as the government’s hospitality curfew, work-from-home policies and online shopping batter the high street. Many shops have already hit the wall. In the first nine months of this year, 13,900 high street stores were forced to shutter indefinitely, up one quarter from the same period in 2019, which itself was a record year, reports the Centre For Retail Research.

In the hospitality sector, 82% of businesses say they need a reduction in rent to survive the winter months, particularly after the UK Government imposed its 10 p.m. curfew for bars and restaurants.

Many tenants aren’t paying their rents, either because they can’t or are choosing not to. At the end of September, the government, much to the dismay of commercial property owners, extended its ban on evictions of commercial property tenants to December 31. The moratorium is not a rent holiday and tenants remain liable for unpaid rent. But many retailers have used the hiatus to preserve cash and/or try to renegotiate the terms of their rental lease.

Landlords argue that without the threat of eviction, tenants have a free pass to not pay up, even when they can. Even big chains that did not have to close during the lockdown are refusing to pay their rents, in the hope of securing a better deal from their landlords. Walgreens Boots Alliance, which was classified as an essential retailer during the lockdown, argues that reduced footfall and a 50% collapse in sales during the lockdown mean it should be treated similarly to retailers who were forced to close.

But the balance of power in the market has shifted in the favor of tenants — at least those that still have a viable business model. Even if evictions were allowed, landlords know that in the current context, they would have difficulty replacing an evicted tenant — and the fact there there isn’t a good alternative after eviction makes landlords more flexible in dealing with their tenants.

But there is a line they refuse to cross. For many, that line is a lease based only on store revenues. Three weeks ago, the struggling fashion retailer New Look was able to secure a revenue-linked model for 402 of its 470 stores, whereby rent will be charged at between 2% and 12% of revenues. Other large stores will no doubt ask for similar treatment. But some landlords, particularly listed ones, are refusing to budge.

“Some tenants are very vocal about what they would like us to do,” said Jean-Marc Jestin, chairman of Klepierre, Europe’s second-biggest publicly traded mall operator whose shares have slumped 65% this year. “But we can say what we are not going to do. We are not going to switch from the current lease structure with [minimum guaranteed rents] plus sales to only sales-based rent.”

Klepier is not alone in its rejection of turnover or sales-based rent. Unibail-Rodamco-Westfield, another mall giant, has also roundly dismissed the idea.

Widespread adoption of turnover rents would not only mean that retail landlords would have to provide much more detailed financial data to their investors; it would also impact the value of listed landlords themselves, says real estate equity analyst at Goodbody, who has been advising a number of U.K. REITs on turnover-lease structuring in the last two years.

“The valuers’ interpretation is that if there is a wholesale move or a switch to turnover leases there would be very severe markdowns in value because of the lack of definition on the income stream… If you are servicing debt, you need a clear income profile. If your retail income has a much smaller fixed component [and a] far more significant variably component, naturally your debt will be more expensive, more complex or not available at all.”

“The short-term effects of the coronavirus pandemic have only just become visible, but the long-term effects will impact lending and banking into next year and beyond,” said Nicole Lux, senior research fellow at The Business School in the City of London and author of a report on bank lending that found that banks, who are now fretting about the value of their collateral, have already cut back on making new loans, which is tightening further the wiggle room for retail property landlords and tenants alike. By Nick Corbishley, for WOLF STREET.

Local authorities gamble in commercial real estate, with impeccable timing. Read… Highly Leveraged Commercial Real Estate Bets that UK Local Authorities Took to Meet Budget Shortfalls Begin to Unravel

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  36 comments for “Amid Eviction Moratorium, Wiggle Room Tightens for Retail Landlords & Tenants in the UK

  1. 2banana says:

    A balance of power shifted by destroying legal contracts and made up edits of power mad mayors and govenors.

    “But the balance of power in the market has shifted in the favor of tenants…”

    • MarMar says:

      That’s part of it, but the article is clear that “landlords know that in the current context, they would have difficulty replacing an evicted tenant” – aka a renter’s market.

      • Joe Saba says:

        IMHO it is better to have NO TENANTS than non-paying ones

        then banksters can own the whole works

  2. MF says:

    Landlords have been in the driver’s seat for so long they don’t know how to negotiate. Bluffing only works if your opponent can’t see your hand. How long has it been since CRE was in such terrible straights? 20 years? I remember the see-through buildings associated with the 90’s oil bust. Could it be that today’s REIT apparatchiks have never worked in a down market?

    And now they want to pawn off assets that are impaired by at least 50% even in the most optimist recovery scenario. The denial reeks to high heaven.

    • Underground says:


    • 2banana says:

      Negotiations is two people agreeing on transaction.

      Lawlessness is voluntary agreeing to a contract and then using the power of the state to allow you to void that contract, take property and escape any consequences.

      • John V says:

        Isn’t this the same thing banks have been doing to savers for the past ten years. In reality, they simply stole their interest which they pay in the form of bonuses to their executives. It’s no-less
        egregious, in my opinion, in fact it may be worse because it affects so many “little” people. Like me.

      • candyman says:

        One thing I have learned in 40 years of business, all things are negotiable. Even signed leases. No different than may decide to negotiate a divorce.
        I disagree that parties voluntarily agreed on leases, then used the power of the State to void the deals. Leases were in effect before Covid,between landlords and renters. Enter the power of the State in closing business, this puts things in a different light. Covid effectively harmed business ability to pay, as noted for some, not all.
        For the landlords refusing to negotiate, they are trying to protect their holdings (understandable) but they rely on the hope and prayer that life will return as before Covid. That, I think is foolish.

        Many businesses have closed, permanently, and continuing to do so, and at this time, I would think it prudent to redo deals. Not necessarily percentage rent either. There are other options. Time to explore the future for all sides, to be winners.

        The problem is exasperated by REITS and CBMS, who don’t want any losses and are extending and pretending. I believe they fail to see they may suffer larger losses by not facing a new world and losing time making adjustments for the benefit of all. Lets face it , they are not benevolent.

    • CreditGB says:

      It seems like these landlords are bluffing to an audience of empty seats. Same as announcing sale of empty rentals to no one, to reallocate capital.
      Sounds like wishful thinking.

  3. Bob Hoye says:

    It seems that the pressures could inspire ambitious governments to take over property disasters.
    Which are essentially financial disasters.
    But over time, governments could turn attractive properties into Soviet architecture,
    Circa 1950.
    Just looking ahead.

  4. William Smith says:

    Well before the “scary virus,” the shops on the high street were slowly disappearing. Talking to various shop keepers, the main problem is the sky high rent. This was caused by the asset bubble and all the games that were played on the way up. The current owners are just the ones holding the bag. I have no sympathy as it was those that overbid for assets that helped, and seemed to justify, the insane price increases. Now that the “scary virus” has pricked the central bank’s “well engineered” asset bubble those current bag holders will have to try to find even dumber bag holders (good luck with that!). Hopefully that will put downward pressure on real estate pricing in general (for those that still have a job after all the dust settles). Now that the renters have the power, they have a duty to be as ruthless as the landlords have been in the past. Some of the contractual conditions to rent in some of the malls have been absolutely ruinous. Things such as regular and expensive retail fitouts from only “approved suppliers” etc. Retail renters were being taken for mugs. Karma!

    • sunny129 says:

      @william Smith

      Ever wonder without this ‘scary virus’ where would be the value of these ‘assets today?

      CBers are helpless and clueless in the face of challenges thrown by Covid 19, all over the world. It pulled the rug under the global commerce!

      It is time for ‘sustainable’ economy to replace the ‘consumption’ economy. perpetual growth is a delusion, especially financed by debt on debt!

  5. Paulo says:

    This quote is a keeper: crystallise significant value already created

    Oh, that’s what people do when they are going under and forced to sell assets.

    • KGC says:

      “crystallise significant value already created” _ I love it! Please believe this has to be worth more than what we paid for it doesn’t have quite the same ring.

      “there would be very severe markdowns in value because of the lack of definition” – But..But..We’re crystallising that value!

      I’m actually starting to pity whoever gets elected to try and kick this further down the road. Frankly I think 2022 is really going to suck.

      • MonkeyBusiness says:

        A lot of people have been saying 20xx will suck. You can substitute 17, 18, 19, 20, 21 for xx, but the fact of the matter is you can always kick the can further down the road.

  6. MonkeyBusiness says:

    Get Her Majesty to buy those properties. It makes it easier for the state to bailout the entire sector. For Queen and Country no?

    • David says:

      Do what other landlords have done and get some mug local council to buy it. I would suggest giving Spelthorne a ring in the morning. They can ‘invest’ another billion £ from the public works fund to add to their already worthless property portfolio.

    • Flashman says:

      It’s all owned by HRH in law any way we are subjects

  7. Nik says:

    I have always wondered over the years..What could ALL the EU,Canadian and Stateside Shopping Center/Mall owners,as well as the Banks and Stock/Bond holders,possibly be Thinking,as they watched year over year ON-Line Sales,just Snowball…??? lolol aloha

    • bigc says:

      Looks good on the landlords!
      Their greed knew no bounds and now its coming home to roost.
      The perpetual squeezing of tenants for ridiculous rents, common area scams has caught up to them.

  8. YuShan says:

    Revenue based rent makes perfect sense. After all, the real economic value of commercial real estate depends eventually on what revenue the occupier can generate with his business. And yes, with so many sales moved online that is a lot less than it used to be. So adjust to it.

    I also want to point out that while real estate may be privately owned, it is still supposed to serve a public need. To keep cities liveable, you don’t want boarded up city centres. So I’m in favour of legislation that guarantees that property is always occupied, for example by the highest bidding tenant. If that leads to lower rents or lower property values, so be it. On the other hand, I also think cyberspace should be taxed like physical space. This would help level the playing field between cyber and physical shops and therefore increase the viability of commercial real estate.

    I’m all for free markets, but the government should set the rules of the playing field in such a way that it leads to desired outcomes for society as a whole. Compare it with environmental rules in manufacturing: you can compete in a free market against each other, but all manufacturers have to comply with environmental rules. Or with banking: banks can compete in a free market, but have to stick to capitalisation rules etc.

    We also should review the way residential real estate works. Legislation should be aimed at achieving affordable housing for everybody. Nobody should have to live on the street or in their car. This is simply what a decent civilised society should demand. There really is enough wealth to fulfil the basic needs of everybody, at least in the rich western world.

    • 2banana says:

      Only bigger and bigger government, with more and more regulations and higher and higher taxes can produce affordable housing.

      Shall we use the San Francisco model or NYC model for affordable housing?

      • Ethan in NoVA says:

        If you taxed the snot out of unoccupied housing (vacation, unoccupied investment, etc) or CRE, that would help force it to turn over no?

    • JC says:

      “On the other hand, I also think cyberspace should be taxed like physical space.”

      Something about this seems very wrong. Cyberspace is already taxed at many many levels. Do you want to create a tax based in the context of relics of past short term business models that are no longer viable?

      Isn’t this creative destruction? Don’t impede it.

      • YuShan says:

        I’m all for creative destruction. However, I believe that physical shops serve society in more ways than just selling products. They also have a social and entertainment function. Many people enjoy shopping as a way to spend their time. That is certainly the case in the city where I live. Without shops, the city centre would be dead and the area would decay.

        Also, I like to see measures to counterbalance some of the winner-takes-all dynamics in the economy. It leads to monopolies and less consumer choice (this also applies to just brick and mortar shops, where big chains take everything over, or small online shops vs Amazon). A way to counter that could perhaps be a progressive sales tax that rises depending on revenues. It would then be beneficial for large companies to break up. Just a wild idea, but problems are real and we have to think out of the box now.

        • p coyle says:

          i like this idea of yours, the progressive sales tax. i have my doubts that it could be implemented, and my cynical side thinks that if it was, the rates would be set in such a way that the really big money would end up gaming the system to their advantage one way or another.

  9. TimTim says:

    Excellent,article. Thanks.

    Just one weency typo. I think you meant ‘ hardest’ not hardiest..’ :)

  10. gorbachev says:

    Revenue based rents could work. The trade off would that the tenant

    and landlord are not guaranteed term.If the bus, sucks out she goes.

    Isnt that the way it works for apt. tenants. Lose your job and

    its goodbye and all that.

  11. michael earussi says:

    You can’t pay what you haven’t got. Seems like the prudent thing for mall owners to do, if they don’t want it completely empty of stores, is to temporarily cut business owners a break by accepting a straight % of sales.

    Whether malls will ever recover their former popularity, at least enough to become profitable for the stores who rent space, is another question.

    • YuShan says:

      Also, there is a self enforcing mechanism in play. If one or more shops in the mall go bankrupt, the remaining shops will get less traffic too. So cutting a deal with some of them makes the rent income from the others more secure.

    • Implicit says:

      Some could start building houses, condos and apts. to rent and /or sell as retail tenants depart. New stores can start merchandising to the new tenants, and/or home owners.
      Perhaps community of 55 and older with the baby boomers trying to stay out of nursing homes would be a good target group.

    • candyman says:

      A better model than straight percentage rent is retailer to pay CAM charges, Real Estate taxes (as they are generally already defined in the lease) and then add a percentage sales. This keeps the the property solvent at a base level, and fair to both the landlord and tenant.

  12. Small Fry says:

    London was always a mega-ripoff for everything: property, rents, tourism, transport, shopping, food, restaurants, leisure…. you name it. And diversest Mayor Sadiq Khan recently bankrupted Transport for London and had to go begging to the govt for magic money.

    So let all the prices drop in free fall. Mid-2000s I paid over 140 GBP for a 12 sqm double room in a budget chain hotel in central London. Breakfast with all pre-packaged items took place in a basement room about the size of a janitor’s closet. Last trip I ever made to that burg.

  13. Julian says:

    If the rent is based on “turnover in store” – what’s to stop a retailer providing tablets to staff and customer in store can purchase their goods via the online store from an undisclosed location and then take delivery of the goods in-store?

    In other words, that income/turnover goes not through the retail store but through the online outlet.

    Of course this doesn’t work for cash purchases, but does work for every type of plastic purchase.

    This should work to reduce in-store turnover to negligible levels.

  14. CrecitGB says:

    All this talk about vacancies, a dearth of tenants, and plummeting office/retail space values, reminds me of the WeWork scheme. Are they still paying for their leases?

Comments are closed.