Retailers and landlords remain in disputes over pre-packs, downscaling, and now monthly rents. Meanwhile, a lease time bomb is ticking, warns Mark Faithfull. However, it could spell good news for retailers.

Property managers association

Hard-hit retailers and struggling landlords are at loggerheads again as their conflicting strategies have resurfaced over an issue that seemed to have been put to bed last year. A letter from a 26-strong retail group put monthly rents back on the agenda at a time of rising vacancies and warnings of a slew of lease expiries, which could see a lot more retail space come back to market at just the wrong time.

In February, bed specialist Dreams and electricals retailer Comet became the latest tenants to seek monthly rent concessions from their landlords after Dreams began negotiating to switch about 50 of its 288-strong portfolio to a pay-monthly basis.

In something of an assumptive close, Dreams chief executive Nick Worthington sent a letter to landlords with a deed of variation already signed.

Comet, under new stewardship following its sale by Kesa to private equity group OpCapita for just £2 plus debt, plans a radical restructuring – it faces an annual rent bill across its estate of more than £75m. It is also approaching landlords across its 248-strong store portfolio, asking to switch from quarterly to monthly rents, and said it is considering closing stores once leases expire or selling stores back to landlords, although it has denied any widespread store closure programme.

Retailers including La Senza, Clinton Cards, Accessorize and Monsoon are also seeking to switch rent payments to ease cash-flow pressures, and adding to demands made by Sports Direct founder Mike Ashley last December. Unlike some tenants seeking the switch, Sports Direct has reported rising turnover and profits but insists that as a tenant that pays its rent promptly, it should also be allowed to stop paying quarterly rents in advance.

But the issue really came to a head in March, when the Property Managers Association (PMA) issued an open letter to landlords demanding to pay rent on a monthly basis. Among the retailers to have signed the letter are Schuh, Comet, Blockbuster, Boots Opticians, Dollar Entertainment, Fat Face, Brantano, Monsoon, B&Q, Tie Rack, River Island, Poundland, Store 21, JD Sports, Pets at Home, Mothercare, New Look and Next.

The rent debate

The letter also disclosed the PMA’s intention to begin lobbying the Government as part of a wider review of the future of high street retailing. The PMA decided to send the letter following the results of a survey undertaken in February by Richard White, New Look’s group property director and the PMA’s finance manager. He asked the 26 association members whether they felt the issue of quarterly rents was a concern. All but one affirmed it was.

However, the British Property Federation (BPF) promptly warned retailers that any co-ordinated campaign to force landlords to accept rent being paid monthly rather than quarterly could be illegal under competition law. The BPF said landlords would be happy to negotiate with tenants who were in genuine need, but warned that co-ordinated letter writing to individual landlords may prove illegal.

Ian Fletcher, director of policy at the BPF, says: “Monthly rents are relatively common on new leases and I know landlords will look sympathetically at individual cases involving existing leases on a case-by-case basis, and provide help where the need and benefit is demonstrable.”

He adds: “What we find disappointing is that some of the nation’s largest retailers – who are not in trouble and mainly owned by private equity firms – seem to want to use their muscle to rewrite business terms for their own profit and to the detriment, ultimately, of pensioners’ investments in property.”

The clarion call from these retailers came at a time when retail landlords are already preparing for another round of rental and lease negotiations following a spate of retail collapses in the period immediately before and after Christmas. This is compounded by store downscaling at numerous retail brands including New Look, which has revealed it could close as many as 100 stores as leases expire over the next three years. Its plans are the result of a review of the group’s property portfolio by consultancies CBRE and Javelin, and reflect the retailer’s long-term view by the retailer that it could operate from fewer, larger stores.

It is still looking to increase its overall footprint and add selling space to its current 600-strong store portfolio. New Look chief financial officer Alastair Miller says: “We see a larger footprint being served through a smaller number of stores. We want to recognise the shift to online, which will affect the smaller markets in the UK. We are looking to achieve more flexibility in our rental base, and we are looking for the co-operation of our landlords to help us do that.”

But under-siege landlords are already looking to fill space vacated by retailers such as Peacocks, Bonmarché, La Senza, Blacks, Barratts Shoes and Past Times. New Peacocks owner Edinburgh Woollen Mill has at least offered the possibility of saving an additional 75 stores on top of the original 388 it bought, but has warned that will be subject to rental renegotiations.

The BPF responded to reports in January that the new owner of Blacks Leisure, JD Sports, intends to renegotiate many of its leases by stating landlords will be happy to sit down and talk, but stressing any pain must be shared. JD Sports bought Blacks Leisure in a pre-pack administration and the struggling outdoor sports retailer previously angered landlords in 2008 by expanding back into shops it had disposed of through a CVA.

BPF chief executive Liz Peace reflects: “JD Sports had the money to buy Blacks and, as JD Sports is a solvent business, landlords will have to think hard about any concessions, bearing in mind the impact that would have on Blacks’ competitors and their own investors.”

For landlords it’s not all gloom. There are some advantages to the changes in lease structures. Guy Grainger, head of UK retail at Jones Lang LaSalle, points out: “Shorter leases, break clauses and more flexibility provide landlords with more opportunities to freshen up the tenant mix. The danger is that retailers may be tempted to spend less on shopfits for the stores if they think they may not be in a location for more than five years.”

Richard Akers, head of retail at Land Securities, adds that he has pushed for far more flexibility on leases, as he believes it would give shopping centre owners more control to freshen up the tenant mix. “I’ve argued for some time that landlords should have more control over the mix and should be able to move out or downsize under-performing retailers. It would enable landlords to take back space and adapt it for the specific needs of stronger performers,” he says, while acknowledging the proposals may not find favour with all retailers.

Landlords had hoped that a clampdown on the ongoing controversy of CVAs would provide them with some respite, but last month the Government announced it was scrapping any plans to reform pre-pack administrations, unconvinced that the cost of changing the insolvency law outweighed the overall benefit.

Employment Minister Ed Davey had proposed that administrators give creditors a three-day warning of their plans to use a pre-pack and provide a detailed explanation of why the measure was used. But the surprise u-turn means landlords will continue to have to grin and bear it. The BPF has criticised the move, arguing the Government has wasted 18 months on the proposed changes and that creditors remain “as exposed to sharp practice” as they were when the debate over pre-packs began. It is now calling for “swift action” to increase protection for creditors of businesses affected by pre-packs.

Good news for retailers may be thin on the ground, but there is no doubt that, away from prime locations, the whip hand is with them right now. Increasing vacancy rates, failing competitors and a growing realisation that valuations must come down should herald lower rents and more flexible terms in the next two years. 

Lease expiries: a glass half empty

Shop to let

Pressures on landlords will not be helped when about 50% of high street and shopping centre leases are due to expire by 2015.

“In shopping centres and on the high street we are coming to the end of the 1980s-agreed 25-year leases, the 1990s 10-year leases and the sub-10 year leases of the last decade,” says James Brown, head of EMEA research and consulting at Jones Lang LaSalle. He adds: “According to our latest research, up to 25% of existing high street and shopping centre leases are due to expire by 2013, or 50% by 2015, versus about 5% and 15% for retail parks by 2013 and 2015 respectively.

“With a reduction in demand for physical retail space relative to 10 years ago, and retail requirements gravitating towards fewer retail locations, polarisation has been playing out, albeit relatively slowly until now. We have not yet seen the true effect of the shift in demand on our retail landscape, but the next 24 months are likely to see a swift and dramatic playing out of this polarisation as lease contracts expire.”

Local Data Company director Matthew Hopkinson says this will be compounded by the comparatively small number of retail locations that international retailers will look at as they enter or expand in the UK. “With all those leases expiring, it’s sobering to note that international retailers are only looking at the top 30 locations,” he says. “It seems inevitable that vacancy rates across the UK will increase as a result.”

Jones Lang LaSalle concurs and believes that these lease changes will trigger both rent reductions and increases in vacancy rates as retailers walk away from under-performing stores. Long leases have protected rents in previous downturns, as retailers have had little chance to negotiate if they are more than three to four years from lease expiry. With shorter five-year lease lengths and break clauses becoming the norm, upward only rent reviews could become the exception to the rule, it says.

Investment values

Hammerson-owned Bullring in Birmingham

Hammerson-owned Bullring in Birmingham

One of the issues for landlords is that many retailers looking to move into vacated space are relatively young compared with those exiting the space.

While this potentially adds to the dynamism of the retail space, it does little for shopping centre owners looking to protect the value of their property investments.

Henderson Global Investors fund manager Michael Neal says: “New retailers coming in on lesser covenants will probably mean less rent and perceived higher risk as far as potential investors are concerned. For landlords that is bad news because of their impact on capital valuations, which puts them in an increasingly difficult situation.”

David Atkins, chief executive at one of the UK’s biggest retail landlords, Hammerson, says in considering buying a shopping centre, the company now looks at covenants and lease lengths and automatically adjusts its valuation of the centre downwards to meet where it believes rental levels will move at renegotiation.