With an increasing number of struggling retailers demanding more concessions from landlords and the development pipeline drying up, Ben Cooper asks what to expect in a tough 2009

So the decorations are down, the mince pies have been finished off and the New Year's Day headache has finally been banished. It's always hard getting back to business after the holiday's indulgences, but even more so for retailers that never really have a chance to get away from it all.

While the rest of the country was settling into another round of charades, retailers were keeping a nervous eye on the festive trading figures. And to make matters worse, rent was due on December 25. Happy Christmas indeed. The question now is: what lies ahead for the property sector in 2009?

After a year when retailers were spoilt for choice with a plethora of new centres to open stores in, 2009 will be a different story. With so few centres opening and scheduled construction looking increasingly at risk, the supply and demand dynamic is shifting.

As Savills director Nick Symons says: “The shopping centre pipeline in the UK has gone from a flow in 2008 to a drip during 2009.”

The bad news is, the worst is still to come. For those retailers that were feeling the heat at the end of last year, December's quarter rent day was a big test. Finding the cash for March's quarter rent day is likely to be even more stressful. Over the next few weeks retailers will be needing to pull out all the stops to make sure they are able to pay their landlords and at the same time appealing to the landlords to make every concession they possibly can.

John Laker, managing director of Ldm, which is project managing the Northern Quarter scheme in Dublin, says: “This year's going to be really dire for retailers. Most will have survived through Christmas but from February onwards it's going to hit the hardest.”

So what is the answer? Retailers will be scrutinising their property portfolios in order to find every possible cash saving. Any constructive dialogues between landlords and retailers that have taken place through 2008 may well continue, but in this very difficult trading climate, while neither will be particularly keen on compromise, it will be essential.

HMV property director Mark Bowles says: “What's happening in the market at the moment is that there is a more concerted effort to keep the dialogue going, but it is getting more selective. The monthly rent debate seems to be more important for retailers that are in difficulties. I think a lot will depend in 2009 on how Christmas turns out to have gone as to how amenable landlords will be.”

But there are areas where retailers can hope to make ground. According to corporate law firm Davenport Lyons partner Stuart Darlington there will be opportunities to get good deals and flexible terms from landlords for the right retailer.

He says: “Landlords are certainly listening to tenants more than ever and if monthly rent payments ease a tenant's cash flow that can only be commercially good sense for a landlord. It will certainly be worth tenants speaking to landlords about monthly rent payments and perhaps other schemes that can help them without causing detriment to the landlord.”

But Darlington warns there is a risk involved with appealing to a landlord for help. “Such requests may be viewed sceptically - the landlord subsequently keeping a close eye on the tenant for any tell-tale signs of imminent insolvency or administration,” he says. “The number of landlords who are quick to take action - with insolvency proceedings or instructing bailiffs - to minimise their loss for any failure to pay rent or sign of impending tenant implosion may also increase. It will depend upon how good the retailer's financial position is perceived to be.”

Development woes

One of the worst and most serious dangers of 2009 is the potential drastic slowing down of the development pipeline. Towards the end of last year the rot had already started to set in, with a number of schemes being delayed for various reasons, such as Summer Row in Wolverhampton, Westgate in Oxford and Sevenstone in Sheffield.

The consequences of a construction slowdown are far reaching. As developers struggle to find the vital financing they need to keep a project moving, schemes will be shelved or even scrapped altogether. In the long term, the knock-on effect will be a serious fall in future supply.

DTZ director Adrian Powell says: “Schemes that are on site are, on the whole, ones that are in prime locations and going to be seen through. Developers who have not yet reached this point are going to local authorities requesting extensions to their development agreements so that the investment they've made to that point isn't at risk of being wasted.”

As a CB Richard Ellis report published last month highlights, short-term delays to schemes could have a far longer-term effect than many believe. The report argues that because of the nature of shopping centre planning and the timescales involved, it could be up to five years before the pipeline is back to 2007 levels.

The problem is that by delaying a project by six months work might not get under way again for much longer. Compulsory Purchase Orders and planning permission expire after a certain period, usually three years. So if a six-month delay means that construction has not started before this deadline, the developer will have to go through the process again. Landlords will be under even more pressure this year to ensure that projects stay on course or they will face a serious gap in their development portfolio.

Powell says: “Pretty much every project in the pipeline at the moment will be being looked at and developers will be saying: 'How do I keep momentum on the project and when am I going to reach the point where I will either have to get an extension to my development agreement or market conditions improve, or ultimately stop?'”

He adds: “Most developers are waiting for things to pick up before they proceed, but I don't think there's a great deal of confidence in the right conditions coming back soon. This will lead to an under-supply of new developments when the market eventually recovers.”

But Bowles believes this isn't necessarily a bad thing if you take a long-term view. While last year's flood of new space coming to the market was a healthy sign of retail demand, you can have too much of a good thing. “There could be a drop off in the pipeline. The market has up until now benefited from having new space which has satisfied retailers' demands, but at one stage there was a danger we would have a lot of congestion going on in the next two years. Now the dynamics are changing,” he says.

Nobody can deny that 2009 - especially this quarter - is going to be as tough as it gets. But retailers are survivors by nature. History has shown that retail is a dynamic and pragmatic industry when the chips are down. There have been big-name losses and there are likely to be more. A hardening of the positions of both retailers and landlords would be unhelpful at this time. In the next few months it will be even more important for both sides to keep channels of communication open. The strong retailers and the more progressive landlords will not bury their heads in the sand.

Retailers can also take solace in the fact that the good times will return. As Laker says: “The retail sector is always the first to be affected by something like this. The positive thing you might say is that as in the early 1990s the retail market was one of the first sectors to come out of the doom and gloom.”

Schemes scheduled to open in 2009

Arc: Bury St Edmunds. Developed by Centros, the scheme will total 265,000 sq ft (24,620 sq m) and include 35 retail units. It is due to open in March.

St David's 2: Cardiff. A 967,500 sq ft (89,880 sq m) extension to the existing St David's scheme, owned by the St David's Partnership, a tie-up between Land Securities and Capital Shopping Centres. Due to open in the autumn.

Southgate: Bath. A joint partnership between Multi Development UK, Aviva Investors and Bath & North East Somerset council is developing the 400,000 sq ft (37,160 sq m) Southgate scheme in the city centre. It will include 56 retail units and the first phase is expected to be completed in the autumn.

Union Square: Aberdeen. The 700,000 sq ft (65,030 sq m) development includes 56 retail units comprising 525,000 sq ft (48,770 sq m). The scheme is owned by Hammerson and is set to be completed in the autumn.