Some property owners are more exposed to the fallout than others.
By Nick Corbishley, for WOLF STREET:
The UK’s retail property sector was hammered by three big corporate casualties last week, even as the country’s shopping centers began reopening after another lockdown. Two of them occurred on the same day: December 1. First, the fashion retail group Arcadia — owner of brands such as Topshop, Burton and Miss Selfridge, with 422 stores in the UK — crashed into bankruptcy. Hours later, the 242-year old department store Debenhams, with 124 stores in the UK, and which had already entered administration twice since April 2019, went into liquidation, after its last remaining prospective buyer, JD Sports, lost interest and walked away from rescue talks. This came just a day after women’s fashion retailer Bonmarche Ltd. filed for administration, putting over 225 stores in jeopardy.
Debenhams will now be closing all of its stores while it remains to be seen how many of Bonmarche Ltd and Arcadia’s stores will be shuttered. One thing is for sure: an even larger hole is about to be left in the UK’s already decimated retail property landscape.
Between them, Debenhams and Arcadia rented a grand total of 16.6 million square feet of store space, with the former accounting for more than 11 million square feet, according to Estate Gazette’s Radius Data Exchange.
Over 28 million square feet of retail space has already been permanently shut so far this year in the U.K. That’s nearly eight times the total amount shut (3.6 million square feet) in 2019 and over double the amount in 2018 (12.1 million square foot). And the 2020 figure doesn’t even include the fallout from Debenhams’ demise and Arcadia’s bankruptcy.
Some property owners are more exposed to that fallout than others:
- Hammerson Plc, the U.K.’s largest specialist retail landlord, which was forced into an emergency share sale in July, rents 16 stores to Arcadia and two to Debenhams covering 330,000 square fee.
- British Land Co. and Land Securities Group Plc, two of the UK’s three largest REITs each have 10 Arcadia stores and 3 leased to Debenhams.
- Capital & Regional, a much smaller REIT whose shares have collapsed over 90% since 2015, reports Debenhams as a top tenant, with three of the retailer’s stores accounting for 2.38% of the landlord’s contracted rent.
It won’t be easy to find new tenants for these stores considering the current economic climate, not to mention the overhanging threat of more lockdowns. Debenhams’ stores will be particularly hard to re-let, given their size and higher running costs. A quarter of the 160 stores vacated by BHS when it hit the wall in 2016 are still vacant.
The UK is already home to a glut of vacant stores, particularly in city malls. While brick-and-mortar store closures are a gathering phenomenon across Europe, the UK is somewhat ahead of the curve, for three main reasons, says S&P Global Ratings:
1. Deeper e-commerce penetration. Even before Covid-19 hit, the UK had embraced online shopping more than anywhere else in Europe. Online retailers’ gain has been bricks-and-mortar retailers’ loss. Most large retail chains that have neglected the online channel, such as Arcadia, have fallen by the wayside. As elsewhere, the pandemic has sharply accelerated online sales. By October 2020 Internet sales in the UK accounted for 28% of total retail sales up from 19% in February.
Note that sales at new and used vehicle dealers and auto parts stores are not included in UK retail sales, but are included in US retail sales and are the largest segment. The same applies to other segments, including pharmaceutical products. Hence, the ecommerce penetration numbers in the UK cannot be compared to those in the US.
2. A greater density of shops. The U.K. has the most shopping centers in Europe, with over 1,500 traditional centers, retail parks, and factory outlets. This is largely due to a particular approach that town planners adopted in the second half of the 20th century, Alistair Kefford, an urban historian at the University of Leiden in the Netherlands, told the FT:
“The public and private sector went for broke in the 1950s and 1960s in terms of expanding retail development in towns and cities… Shop rents in these redeveloped centres were so much higher than what went before . . . whole swaths of small businesses were destroyed.”
The resulting higher density of bricks-and mortar stores has given rise to more intense competition among retailers, which coupled with the unstoppable rise of e-commerce has contributed to the challenging retail environment.
3. A higher rent burden. The largest mall owners in the UK (Hammerson, Intu, Land Securities and British Land) charge higher rent as a proportion of retailer sales than their counterparts on the mainland (Mercialys, Citycon, Deutsche Euroshop, or Klepierre), according to research company Green Street. Higher rent costs tend to translate into slimmer operating margins for retail operators, especially when sales productivity does not compensate.
This may partly explain why so many retailers in the UK have struggled to pay rent since the first lockdown, in late March. Opportunism has no doubt also played its part, as legions of tenants, both large and small, have taken advantage of the government’s blanket ban on evictions of commercial property tenants to hold back their rent. Some retailers simply don’t have the money to pay right now or are desperately trying to preserve cash.
But for others, it’s a matter of choice rather than necessity as they’re trying to renegotiate their rents downward or even pressure their landlords into accepting a lease based largely or purely on store revenues. Fashion chain New Look has already pulled this off. But some listed landlords, including European listed heavyweight Unibail-Rodamco-Westfield, are resisting this change tooth and nail, largely out of fear that the resulting lack of clarity surrounding their income stream could result in sharp markdowns of their own value. By Nick Corbishley, for WOLF STREET.
Asset stripping by its owner, years of brick-and-mortar meltdown, topped off by the Pandemic. Suppliers, landlords, and pensioners twist in the wind. Read… Just in Time for Holiday Shopping Season: UK Fashion Giant Arcadia Crashes into Bankruptcy
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I see no problem. These retail spaces will be swept away like garbage and replaced by repurposed, upgraded virtual daytrading centers where people will … oh wait, they can do that from home — never mind. Maybe those spaces can become decentralized server farms for daytraders that need some sort of extra capacity — I’d invest in that!
?
The UK is already filled with betting shops
Very confusing.
Shop rents in the UK didn’t really didn’t start to go insane until the late 90s . And certainly not in the 70s.
How would more shops and retail store locations in a city center force shop rents to skyrocket by itself? Especially with high interest rates?
“The public and private sector went for broke in the 1950s and 1960s in terms of expanding retail development in towns and cities… Shop rents in these redeveloped centres were so much higher than what went before . . . whole swaths of small businesses were destroyed.”
Retailers are becoming obsolete because they are competing with designers and manufacturers. Most people buying a branded item just go to the brand website. This is especially true with luxury items and big brands.
Only merchants that design and make their own products are going to survive as brick and mortar stores. Or stores that carry exclusive items.
Petunia, I always read your comments with great interest. I’ve noticed you have a thing for big name brands….do you really think they’re great value even at deep discounts? Is the quality the same as what earned them their reputations?
Big brands come at all price points. Not all luxury goods have good design/quality, some do, some don’t, some are worth it at the right price. Big brands with longevity usually have at least decent design/quality which is what allows them to survive.
In fashion, very few expensive items are worth the money. Most people buy the brand because it is the safe purchase. I only buy what I like and can afford. I have the confidence to wear what I like, many women do not, which is why they can be coerced into paying thousands for luxury brands.
I own many premium brands, many of them relatively unknown with exceptional quality. My last UK purchase was from Aspinal of London, a handbag, with design/quality comparable to bags costing 10X the price.
“242-year old department store Debenhams, with 124 stores in the UK…went into liquidation..”
I agree with your comments, Petunia. I also wonder if the shift toward ecommerce will continue to decimate brick-and-mortars even with the scenario you suggested. Perhaps we’re effectively seeing the end of modern-day buggy whip manufacturers.
Brick and mortar is dead because, like it or not, the mall is a microcosm of the community at large. All the social problems, safety issues, and crime activity are on full view at the mall. I don’t prefer online shopping, but I don’t want the extra exposure to the underbelly of the community, while I’m spending money.
the big will/are now getting BIGGER
and we all love how small costs to BIG company put so many SMALL BUSINESSES out of business
Kinda explains why Brick and Mortar is still alive and kicking in South East Asia but dying in the west…
@Petunia
what has changed is that you are old, not that malls are more underbelly.
@gotcolleteral
SE Asia has more growth and with it growth inflation. In the West if half the sneakers are now sold online it means B&M sells 50% less. In SE Asia it means all the growth has gone online but B&M sells still the same number. And growth inflation has allowed to rents and depreciation to be nominal stay constant, be paid
I have a little different take. Total retail sales is around $5 trillion in USA and much of it is low margin. E-commerce is going to quickly eat most of this and then will generally be low margin low growth industry. Anyone paying high multiple for E-commerce better have a safety net or have hand on sell button as once growth rolls over you are going to be looking at price to sales of less than 1 for industry.
Aloha Amigos..this Comes as a massively Big Surprise..Why..? E-commerece has been the 600 pound retailing Gorilla and growing,since the “Internet-egg” hatched out as Amazon et al..ages ago..! Just as Netflix and its Ilk are on-line theaters, so are the On-line retailers nothing more than Department stores..? People have always searched Convenience and Value and needless to say even more so in a “lock-down” environment aloha
… “as many as 25,000 (U.S.) stores will close this year, according to Coresight Research
Mall operator Simon Property Group, for example, is reportedly in talks with Amazon to convert department stores into e-commerce fulfillment centers.”
However, in a different recent story, “Amazon to Expand Oklahoma Footprint With $80M Project” … but, generally, Amazon doesn’t waste time or money demolishing old properties and going through ugly permit processing, they build from the ground up ASAP. Those dead malls, will remain dead — and Simon Property Group will have to look for boatloads of karate studios. I assume the REIT business has a massive correlation to failing retail spaces, so dividends from that dead horse will most likely dry up soon …
I doubt that cash flow from malls being repurposed into community colleges, golf course or graveyards will be great investments for anyone. Oh sure, these spaces could become workspaces for robot/AI development, but as with Amazon, these complicated old spaces are filled with unprofitable challenges.
One huge global growth industry will be demolition!
Interesting thing is some of these failing very large retailers *had* the money to build great online businesses. The ones who invested in Digital are going to be OK. The ones who delayed or ignored it are done for. It’s simply a matter of management failing to see the massive opportunity in online channels and adapting accordingly. Look at the profiles of the managers who failed to adapt to the digital new world. I personally hope for a return of small business selling locally-made high quality goods. Variety is the spice of life. I think there may be a future where people are deprogrammed from this habit of seeking lowest price regardless of quality and provenance and looking for quality and longevity and provenance in the things they purchase.
Mr Stone..may I respectively remind you that many of your hopes and verbiage while commendable are now..’Old School’. Unfortunately in another half-generation,most people will not even USE nor Understand most of those words and concepts aloha amigo
I fear you may be right dear sir.
+1
Old school: BA as an engineering company (pre MacAir “infection”)
New school: BA as a financial focused company
Race to the bottom (LCD* applicable) in full swing.
*Least Common Denominator
I’m a analog dinosaur foraging in the digital forest.
– “The ones who invested in Digital are going to be OK”
I wonder how to measure the digitalness of the business. I am not in retail, but I imagine that the showroom – being it physical or onliny-digital – represents 20% of the business.
The other 80% is not discussed much.
” I personally hope for a return of small business selling locally-made high quality goods.”
RS, I certainly hope so. But my experience, thus far, is that local artisans and even niche farmers must sell to the retired upper-middle-income retirees in order to have a viable business model. I know, my wife sells ‘range-free-organic-nonGMO-farm-fresh” eggs for $4/dozen at the local Saturday Market. Buyers are out-of-state retirees living the life. Middle-income people and lower shop at Walmart or the equivalent. We buy regular eggs at the store for $1/dozen for our own consumption and sell the fancy ones to the wealthy. It’s a game.
Exactly!Especially in certain niche products,I think there Is room for brick andmortar shops wherein maybe thoroughly tested health products and foods could be for sale.So many quality and scam issues In the food,vitamin,supplement markets.Thinking U.S. Made health product like medicinal mushrooms,ginseng,vitamin c without the sugar usually found in the pill.Besides high quality,thoroughly inspected items,the store Must employ service-oriented,competent,articulate staff,not hust some zombie halfteained clockwatcher.The store Has to be a destination,an Experience worth the inconvenience of leaving the home,dealing with traffic,using time to get there and shop.In response to those who flippantly say,”so what,oh well,etc. The so what is the Fact that Thousands of parents will or have lost their incomes and their whole family will suffer along with the other businesses the retail staff patronized.
I am wondering if small brick and mortar makes a resurgence? Don’t get me wrong, I buy online and have always avoided malls and big stores because I hate crowds and aimless browsing shoppers. However, it is quite pleasant to go into a decent bakery or butcher shop and buy a decent product. I would assume this would also be true for Petunia’s clothing shops. My daughter lives in a smallish town with angle parking. If you don’t pickup the cinnamon buns by 11:00am you won’t get any. The butcher, right next door, has a son in the NHL and we’ll talk hockey and he’ll make recommendations for a particular meal. My wife buys sandals from a small shoe store across the street.
Good riddance to the malls and chain stores. Hello neighbours buying from neighbours.
There are still small retailers doing big business in specialty niches because they understand their market/customer. For example, the collector sneaker business is booming with sneakers retailing and reselling for thousands.
Social intercourse is an essential part of being human one only has to look how lonely and sad so many people are when, obsessed by todays technology,meeting and greeting a fellow traveler in daily life can keep us sane, perhaps Im just old fashioned.
Sorry, but did anyone get a good laugh after reading the two sentences that start at “My daughter”. This is where editors are useful.????
Ok but does the baker and butcher actually want to spend their time talking about whatever? I have customers all the time that waste my time with their BS some you can get rid of quickly some not so much.
Mixed comments.As someone who worked in hospitality and sales positions,I had many customers who did Use alot of my time and attention and quite often tried to get very personal.My personal life is Just that-Mine.It is Not matwrial for your entertainment or ego boost-you get to judge and feel superior or try to direct my life or get a date.No problem shooting the breeze and being pleasant,welcoming,helpful,but there Are boundaries.That said,getting rid of customers is Exactly the Wrong attitude because maybe alot/most of the time they do not buying all that much or anything,but there may very well be the surprise Big splurge or a Great and profitable referral.That talkative customer may very well know relevant,important people or information to help you in the future.It is funny how life has twists and turns and opportunity just suddenly shows up.Maybe You being polite and attentive is All that keeps the talker from committing suicide,who knows?Be careful of fellow human beings” feelings.Regarding digital:not an either=or choice with little shop.There are too many redundant businesses,some need to die.Digital is Not a savior,it is an opportunity to expand what is sold and how it is sold.Businesses need to be more creative and aggressive sometimes.Learn Sales and psychology and then go the extra two miles!
– “if small brick and mortar makes a resurgence?”
The beginning of the small independent shop disappearance was in described brilliantly in the book “Au Bonheur des Dames” by French writer Émile Zola (published in 1883).
Now it looks like the endgame for small shops.
Unless a technological and/or social accident brings us back to 19th century.
Be careful what you wish for.
Every company is small bubble by definition. You don’t hire people that will disrupt the existing operation.
Some of these businesses were doomed by e-commerce, but a deeper issue is “Icarus Finance” (self-victimization by hubris – too much risk-taking – that greedy temptation to fly too close to the sun).
Any homeowner with a mortgage and an erratic paycheck knows that high fixed overheads and weak cash reserves are doom when the inevitable (but always “unexpected”) income shortfall hits. The lesson is always to have several months’ extra cash as a backstop. One would think that “mitigate existential threats” would be part of Management 101. It’s sad to see so many genius MBAs divorced their businesses from such basic principles in their quest for riches.
But their lenders and shareholders did no better, so now all will suffer.
Do you know me? I carry the Buy More Junk card. Don’t stay home without it.
“the collector sneaker business is booming with sneakers retailing and reselling for thousands.”
Building a sustainable business/economy around Beanie Babies is a bad idea.
My guess is that a very high percentage of those “sneaker collectors” (oy vey) paying hundreds/thousands for an item that can also be had at Walmart for $10 are dreaming of becoming rich by flipping those shoes.
There simply are not enough truly well heeled (heh) people with enough disposable income to pay thousands for sneakers…who wouldn’t think that it is an absolutely daft idea.
The ever shrinking middle class doesn’t have the resources for rank goofiness anymore.
Certain hothouse subcultures and metros tend to think their transient obsessions extend to millions of other people.
They don’t.
Some of those sneakers are indeed bought on sale and stashed for resale. Some are purchased because they are designed by or worn by a celebrity athlete. Many are limited runs.
The market for these sneakers is big and global. There are sneaker conventions in every major capital around the world. Markets are markets, they don’t have to make sense.
Otho needs a vintage lei$ure $uit! Fess up, who’s holding one in storage?
I’m wearing mine!
I don’t fit in mine anymore!
Is it like the one Leisuresuit Larry in the Land of the Lounge Lizards used to wear? Very collectable.
It’s not hard for stores to undercut online retail if they don’t pay exorbitant rents. Where I live (Hartford CT) there are plenty of niche stores catering to black people that offer good value. There is even a big store right downtown next to a bus stop that has good prices. For much of the stock I think they use their own designs and sometimes their own label.
I’m not sure what to call their niche. The style runs to the flamboyant. Since I don’t mind that, my only problem is that it’s hard to get pants that aren’t severely pegged.
For years, commercial landlords have benefitted from upwards-only rent reviews in the UK. The birds have finally come home to roost.
These excellent posts have given me the greatest of all ideas. I’m going to build a REIT that is focused on repurposed department stores being used as karate studios but I don’t want to offend anyone by calling it karate so I will instead call it Cov-atay TM. After the miracle vaccine is miraculously distributed people will be looking for fun things to do indoors with lots of strangers and Cova-tay TM will fill the bill. We will also buy all the dirt cheap mannequins and use them as our own cobra-kai baddies. We can operate a whole sub-chain of Cova-tay TM Juice and Hookah Bars, Cova-Tay TM cowering spaces. Do some coding and when you hit a bug do some Cova-Tay TM. Heck ya. Who’s in? I’m looking for partners.
Looking forward to your IPO. I am looking forward to the usual CNBC idiots pumping it for you.
Habit, there is an element of habit, once people stop using something they don’t restart without good reason, be that price, exclusiveness or whatever.
Local councils have made it hell on earth to drive in to a local shopping center congestion charges sky high parking when you can find it, one way systems Hampton court maze would be proud of, public transport is more expensive than a taxi and provides a dreadful service, especially in the light of COVID, why would anyone presented with an ever expanding on line choice with 48 hour delivery, and the same items discounted cheaper than bricks and mortar put up with the hell of retail shopping. Furthermore after six months of lock down a lot of people have lost the bricks and mortar habit and won’t be returning to anything like the same extent.
A lot of the same arguments applies to hospitality, of those who used to drop in for a casual early evening or lunchtime beer are out of the habit after six months of not being able to, and a good proportion won’t ever return.
The future of in person retailing and a lot of hospitality, including sports events is very diminished for a considerable time, we are all to some extent creatures of habit.
Maybe we are seeing the return of the intinerant trader in different form. Going to town and shopping on high street, or main street was an all day affair, or longer.
Sears went out of business too soon.
The people who made main st retail too expensive will also make online expensive with taxes, fees, digital charges etc, etc. Then our buying will head off again in the next cheapest direction until the money hungry governmental idiots, local, regional,national, and a la the EU, international , will increase the costs of that particular direction as well.
Hi all,
Well for years many have professed that buying property was a no lose proposition over the mid to long term be it residential or commercial. To me it looks that is all about to go up in smoke.
Besides these well known massive companies failing there are lots of much smaller business’s that have emptied out their shops and closed for good and guess what even in areas where once to get a shop required a premium to get in empty units abound and there is no one left or waiting to get one either.
The big commercial properties are in even worse shape IMO as not only is there no one wanting these properties due to the absurd business rates and rents wanted by landlords there is just so many to choose from all with little to no chance of finding any tenants. The days of big commercial properties making their owners rich are over as they are more likely to bankrupt them now.
Just now there are all sorts of programs in place to extend and pretend so all is well but they will all have to end sooner or later. Now when they do we are really going to see things go bad very fast IMHO.
As for how the stock markets anywhere can all be hitting new highs is just beyond belief I can not fathom what they are priced on because it sure as chips isn’t reality. Which is going to come and smack it hard in the face real soon with so many defaults, evictions and unemployment rising all just waiting for the end of these extend and pretend programs.
Mall retail going bankrupt 2 weeks before Christmas? That sounds to me insane. Is the business going that bad?
I have visited two pubs in the last week since they have reopened but only with the stupid substantial meal rules, one a Greene king chain pub had myself, my two guests, and one other customer in a huge pub, capacity 350-450 people, with seven members of staff. The other, an independent, had the owner and two members of staff serving myself and my guest in a 300 capacity pub.
The substantial meal rule has effectively made a casual pint £15 pound a time, (since you have to buy food as well), I can go and buy SEVEN litres of cider in a supermarket for that price.
Both the independent owner and the chain manager confirmed they were running at a massive loss.
Pub owners should be secret sellung other profitable items or leasing rooms cash and carryon.Come on people wake up!Millions ofpeople have survived communism,totalutarianism,bolshevism,death squads.They had underground networks and businesses.Why is everyone so slow?Chicago-style speakeasies or popup street vendors,Russian barter networks.Figure it out!