The wave of CVA activity this year has seen retailers begin to demand comparative rent cuts from landlords. Retail Week analyses whether rents will come down across the board, and can landlords survive if they do?

As summer turns to autumn, and the retail sector begins to look ahead to the long final stretch of the year leading to the golden quarter, the spate of retail CVA and administration activity earlier this year appears to have tapered off. 

However, landlords are still reeling from the effects of these CVAs as a wave of healthy retailers demand commensurate rent reductions.

“We do not have too much space, we have too much rent, rates and service charge”

Lord Wolfson, Next

Retailers such as Next, Primark, H&M, Clarks and River Island are among those that have pushed landlords for rent cuts in line with some of their rivals who have undergone CVAs.

H&M, in particular, is playing hardball. It emerged over the weekend that the Swedish fashion giant has taken a hardline stance on its leasing terms, pushing for turnover-based rents and demanding that items returned to store, including those purchased online, be deducted from that shop’s revenue.

In response to an increasingly aggressive stance from their retail tenants, some of the UK’s larger landlords such as Intu have publicly hit back at such requests. Last month, Intu boss Matthew Roberts told Retail Week it was “not in the business of discounting our space”.

“The time we hold discussions is when we are looking to get a new lease signed. Or when one lease ends and they want to start a new lease. We are not in the business of discounting our space. We are not about to do a wholesale rebasing of our rents,” he said.

Retailer demands

The rationale behind retailers’ demands is clear. Some healthy businesses feel that competitors that have undergone a CVA have been given an unfair commercial advantage.

As the chief executive of one fashion retailer who was asking for rent cuts on units near a competitor that carried out a CVA asks, why should his business be punished for doing well when competitors are essentially being rewarded for trading poorly?

Explaining the thinking, one retail property adviser says: “Everyone is actively managing leases at the moment. Any retailer worth its salt is looking to protect its interests. If you agree to sign a new long lease, without at least exploring the possibilities in the market, then you shouldn’t have a job.”

Next boss Lord Wolfson agrees. He said earlier this year: “We do not have too much space, we have too much rent, rates and service charge.” Last year, Next negotiated a 29% rent reduction on the leases it renewed.

Footwear brand Clarks is also demanding reductions of up to 30% from landlords, in exchange for extending leases.

Ann Summers has won better property terms from landlords on most of its 100 branches but the refusal of property owners to be more flexible means a CVA may be considered for those where terms have not been struck.

Ann Summers boss Jacqueline Gold wrote in Retail Week last month: “I have been heartened by most of the conversations we’ve had with our landlords. The vast majority of them live in the real world and understand that circumstances have changed. They know that in the multichannel world, if stores are going to make money in the future, the cost of occupying them has changed.

“These constructive and open discussions mean our customers, colleagues and suppliers can be sure that almost all Ann Summers stores will continue to trade for many years to come.

“They make it even more disappointing that a small handful of landlords – including one or two of the biggest names in the industry – continue to bury their heads in the sand and pretend historic rental levels are sustainable in future.”

How much can you cut?

But what level of rent reductions could retailers expect?

Next operates on the assumption that shop rents will be 25% lower than rent on leases signed three years before.

However, Harper Dennis Hobbs head of retail consultancy Jonathan De Mello says the level of cuts will depend on what kind of location stores are in.

One of Ann Summer's new stores

Ann Summers has won better property terms from landlords on most of its stores

“In premium locations, you’d expect something in the vicinity of a 15% to 20% reduction in rents,” he says. “In secondary centres, you’d be seeing fairly substantial reductions now. In good market towns, retailers wouldn’t get much more than they would off premium centres – 25% to 30%. However, in some of the less affluent towns across the UK, you could see anywhere between 35% to 60% rent reductions.”

However, a source at one of the large institutional landlords says while it had seen rent reduction trends across high street fashion brands, the picture was stronger for non-consumer brands, as well as food and beverage operators. 

Meanwhile, incentives for retailers to open a store or renew a lease are rife.

One property consultant says: “Of the new deals we’re doing, 80% are highly incentivised in terms of rent-free [periods], but also come with what we’d call a ‘warm shell’ – a unit that’s ready for staff to go straight in and start trading with the most minimal of fit-outs.”

Landlords on the back foot

But can’t landlords just say no to these demands to cut rent? The property consultant says playing hardball will be difficult as there simply isn’t enough demand for retail space right now.

“You’ve got to this point now where what’s the landlord going to do? Are they going to turn around to a retailer and say: ‘Sod you, I’m going to go and find another tenant’? They could be waiting 12 or 18 months to find another occupier and, even after that, they don’t know what deal that’s going to be. It could be the same as the old one, or worse with more breaks,” he says.

KPMG head of UK retail Andy Pyle agrees and says many landlords are open to negotiations around rents.

“Before the current spate of CVAs,  it was quite hard to get landlords to engage,” he says. “Now they’re very much open to those sorts of conversations.”

Gold acknowledged that the majority of Ann Summers’ landlords “live in the real world and understand that circumstances have changed” and Hotel Chocolat founder Angus Thirlwell says his landlords have “wised up”. “We’ve seen quite a few really nice opportunities [in the property market] and landlords have started to wise up to what’s going on.”

Property values plummet

While landlords may well be more open to these conversations, the vast majority must be mindful of the valuations on their properties too. 

At its most recent set of interim results, Hammerson said that “low transaction volumes and a weak UK retail market impacted portfolio valuations” to the tune of negative 4.4%. Intu saw an even more marked fall in the value of its assets, down 9.6%, while net rental income for the same period slumped 17.9%.

Savills head of national retail Stuart Moncur points out: “If a landlord has third-party debt against an asset, then they’ve got covenants to withhold. They don’t have the abilities to breach those by accepting lower rents.”

“It’s a change in the market that we’re seeing. In 2008/09 the market was wondering when it would get back to normal again – there’s no normal now”

Stuart Moncur, Savills

De Mello says offering other tenants incentives beyond simple rent reductions can enable landlords to preserve property values. He has witnessed property owners offering rent-free periods extending to two or three years on a 10-year lease, along with marketing contributions, and help with fit-out costs and service charges.

However, the consultant says the sums will not add up for some.

“For some landlords, it would cost them more [to let at lower than the value] than it would for them to just leave it vacant. On a lot of property, the loss of capital value would be so significant, they could actually survive a few years leaving it vacant and hope the market comes back”.

Where to from here?

Regardless of which side of the fence they sit, all agree that the UK retail property sector has fundamentally changed.

Moncur surmises: “It’s not market forces per se, it’s a change in the market that we’re seeing. In 2008/09 the market was wondering when it would get back to normal again – there’s no normal now.”

The property consultant agrees, saying “at the moment, it’s an absolute free-for-all”.

Yet both parties agree that there will always be a need for physical stores. So, how can the two proceed?

H&M sign

H&M is one of the retailers now using a turnover rents model

Moncur believes there’s a need for closer relationships between landlord and retailer. “Lease lengths are getting shorter and rents are getting more turnover related. The market is definitely moving towards shorter leases and rent being payable related to turnover and likely to be inclusive of rates, service charge and insurance, as well as rents.”

Both H&M and River Island are using a turnover rents model going forward, and the system is already prevalent with out-of-town retail parks such as Wembley Park’s London Designer Outlet. 

Moncur adds: “I think that the relationship between landlords and tenants needs to get better and that occupiers need to share more turnover information with landlords.

“Landlords need to realise that not all tenants can pay the same levels in rent.”

While Pyle agrees, he points out that some landlords with well-performing schemes will always be negotiating from a position of strength, regardless of the wider market.

“If a retailer can see they’re trading from a good location, they don’t want to suddenly have that location taken away from them on a short lease. It’s location-specific – poor locations will see shorter lease lengths, more breaks, and lower rent. Better areas will balance out.”

The property consultant agrees and believes that once the current CVA madness subsides, landlords with strong retail schemes will be able to call the shots once more. “It’s survival of the fittest,” he surmises.