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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