The property market has swung in favour of retailers during the recession, but is it about to move back the other way?
There have been few reasons for retailers to break out a smile in the past 18 months, but monthly rents, freezes, rent-free periods and cash incentives have been among the few positives to come out of the downturn.
Property has proved to be one area of business that retailers have made some ground in. While demand ebbed as retailers shelved expansion plans and store groups floundered, retailers were often able to negotiate better terms and landlords had to be more flexible.
But are the tables beginning to turn in favour of landlords once again? Last week Francis Salway, chief executive at property giant Land Securities told Retail Week the days of concessions on existing leases were over. Salway says: “We are occasionally still getting requests for concessions and we have led initiatives on issues such as service charges, [but] we don’t believe it is appropriate to renegotiate contracts which have been agreed.”
Salway says he has seen the early signs of an upturn in demand in recent months. He admits the market is still difficult and there is a space overhang in some locations, but maintains: “Others have not quite as much, and now in one or two existing schemes if you had a 5,000 sq ft unit to let there might be more than one retailer which wanted it. Had you gone back 12 months, people would have said any vacant unit was a problem.”
Land Securities has also revealed a new type of lease called Clearlet [see panel overleaf]. It is structured to be more flexible than traditional leases to better reflect the changing environment. Under the terms, for example, Land Securities can demand to see turnover information from the retailer - something retailers have traditionally been against - and in return it will discuss the possibility of monthly and turnover-related rents.
Landlords are keen to talk about partnerships rather than who may or may not be in the property driving seat. British Property Federation chief executive Liz Peace says: “We’re seeing landlords moving away from whether it’s tenants or landlords in the hot seat. Instead they’re working more in partnership.”
Peace says that other landlords are likely to follow Land Securities’ lead in offering new solutions like Clearlet. “Lots are already doing similar initiatives to install confidence in long-term relationships,” she says.
Local Data Company business development director Matthew Hopkinson agrees. “We’ll see a partnership between landlords and tenants that we haven’t seen before. Lease structures are changing, in terms of rent reviews and payment frequency,” he says.
A recent deal struck between DIY giant B&Q and landlord British Land shows the kind of partnerships that work for both retailers and landlords.
B&Q secured a 10% reduction in rents for seven of its warehouse format stores when it signed new 20-year leases without break clauses. In return, British Land has the security of a strong, long-term tenant.
A British Land spokeswoman says: “Regardless of market conditions, we will continue to work closely with retailers to ensure we are meeting their needs. As proved by our recent portfolio deals, communication is key and we will always prioritise relationship-building in any market outlook, as this reaps mutual rewards.”
Ian Playford, group property director at B&Q owner Kingfisher, says he remains cautious about the outlook for next year, and so will retain focus on “self-help initiatives, such as operational improvements and operational cost reductions, rather than relying on any upturn in the market”.
He argues that it is in the interests of both landlords and tenants to conduct an “open dialogue to identify sensible solutions, including monthly rents”.
Travis Perkins, which owns DIY chain Wickes, is also taking a cautious stance, and believes it is dangerous to call an upturn in property demand at this stage. Its group property director Martin Meech says: “It’s difficult to see why you’d be confident about the occupancy side.”
He also points out that the nature of the landlord/tenant relationship has been fundamentally changed by online, and that most retailers will seek to expand their online offers when any upturn does come. “As retailers get more optimistic, they will put their investment into this, not a 10- to 15-year lease commitment,” he says.
Arcadia’s decision to focus on fewer, larger shops, revealed by Retail Week (October 23) is also an indication that demand for stores may well be lower than some landlords hope.
The integration of Bhs into Arcadia will result in a lower rent bill for the retail group, but also hundreds of shops that landlords will have to find new tenants for. Arcadia owner Sir Philip Green wants to “reshape the portfolio” so he ends up with fewer stores but more space. The group has leases expiring on about 300 stores in the next two to three years.
Jason Sibthorpe, head of retail at property agent GVA Grimley, says that if retailers focus their attention on larger stores in major towns, it will
create a challenge for smaller towns. “We may see a great deal of pressure
on these smaller towns,” he says.
There are still retailers that want to open more shops, though, and those that do will be in a position to negotiate more attractive lease lengths, according to Sibthorpe. “Lease lengths have become shorter,” he says. “10-year leases were the norm, but now five years are becoming more common, or five years with a break.”
He adds: “Monthly rents are here to stay. One or two of our clients insist on it - it becomes a deal breaker.”
He does not believe the tables have turned back in favour of the landlord. “It’s been a fascinating period for property, and the occupancy market is still very challenging,” he says. “In the last 12 to 18 months there has been masses of supply to choose from. Retailers were saying: ‘This is what I’ll offer you: take it or leave it’.”
Mark Bowles, property director at entertainment retailer HMV Group, says some of the changes that have arisen from subdued demand are likely to be long-term ones. “Shorter leases, leases with break clauses, monthly rents - these things are becoming more common in the retail landscape,” he says.
Bowles does not believe landlords are necessarily clawing back power. “We have been taking on stores with big incentives,” he says. “Landlords are still prepared to offer incentives to brands that they have faith in.”
According to a retail property director of a well-known fashion chain, “the boot is still on the tenant’s foot at the moment”. He says he has negotiated some “fairly large deals” in the past 12 months, thanks to the lack of demand for space in the recession.
But, with relatively few retailers in a position to expand, new developments that have opened in the past 12 months have found the going tough. Cardiff’s St David’s extension, for example, was just 70% let when it opened its doors last month. And retailers including Marks & Spencer and Boots have struck some exceptional deals with Hammerson to open in the landlord’s new Aberdeen development, Union Square.
Hammerson said its flexible approach ensured it could pull in big names in a tough climate. More generally, it has written to all its big retail tenants in recent months to find out what each of their individual needs are, and is sifting through the feedback now.
Meanwhile, some developments have run into financial difficulty. Wakefield’s Trinity Walk Shopping Centre suffered a setback when it fell into administration last year. Work on the site stopped halfway through. But, thanks to a joint venture between Sovereign Land, Area Property Partners and Shepherd Construction, construction is expected to start again in January, and an opening date of Easter 2011 has been set.
There are few significant developments opening in 2010 - although Hopkinson says that is no bad thing. “Landlords need to concentrate on sites they already have in town centres - there’s a hell of a lot of space vacant,” he says. “Local authorities and landlords have to develop a solution. They can’t just go and build new developments. Landlords are waking up to this now.”
Peace agrees that a lack of new retail developments has its plus points. “We’ve had a spate of activity in the last few years, but now demand has plateaued,” she says. “Landlords are repairing their battle wounds and building up their reserves. They are looking at securing long-term stability.”
And although Salway sees signs that the market is stabilising, he readily admits that retail is not out of the woods yet. “I absolutely expect further insolvencies - history suggests you get companies failing even as the market begins to turn,” he says.
During the recession retailers have grown accustomed to having the upper hand. Landlords have shown greater flexibility - the question is whether when the market turns back in their favour, that flexibility will be here to stay.
2010 is likely to bring the lowest amount of new shopping centre space in the UK in almost 15 years, according to the Shopping Centre Development Report by property agent Cushman & Wakefield.
Openings set for the next two years:
- Eldon Square, Newcastle (third phase)
Developer: Capital Shopping Centres
Size: 700,000 sq f
- St Catherine’s Walk, Carmarthen, Wales
Developer: Simon Developments and Invista
Size: 275,000 sq ft
- Southgate, Bath (second phase)
Developer: Multi Development and Aviva Investors
Size: 140,000 sq ft
- The Rock, Bury, (second phase)
Developer: Thornfield Properties
Size: 550,000 sq ft
- The Avenue, Spinningfields, Manchester
Developer: Allied London
Size: 400,000 sq ft
- One New Change, City of London
Developer: Land Securities
Size: 215,000 sq ft
- Parkway, Newbury
Developer: Standard Life Investments
Size: 475,000 sq ft
- Trinity Walk, Wakefield
Developers: Sovereign Land and Area Property Partners
Size: 500,000 sq ft
- Westfield Stratford, London
Size: 1.9 million sq ft
Data: British Council of Shopping Centres
Clearlet: the deal
Land Securities’ Clearlet lease includes:
- No premium for paying rent monthly
- A response on requests for underlettings in 15 days, failing which the retailer can proceed
- Rent reviews that can be linked to the Retail Prices Index
- Possibility of rents being linked to turnover
- The retailer has to share turnover information with the landlord