Retail Property Summit: vacancies in secondary markets
Published: 25 February, 2010
Paramount among the issues under discussion was the continuing level of retailer failures and the rising tide of empty shops they leave in their wake, particularly after the Ethel Austin and Adams announcements.
“The trend last year was that vacancy was increasing, and they peaked at the end of the first quarter last year, with a round of retailer failures and CVAs” said Hammerson’s managing director of UK retail Lawrence Hutchings. “But we’re seeing healthy retailer demand across the portfolio. Obviously, it’s not as good as it was three years ago, and the cost of transactions is higher.”
But Hutchings cautioned that Hammerson’s experience was in super-prime shopping centres and retail parks, and may not be representative of the whole market.
Mark Bowles, property director at HMV, has experience of a wider cross-section of the market through the 600-strong HMV and Waterstone’s portfolios. “There’s a real divergence between the best and worst sites,” he said. “The worrying thing is what’s happening to the secondary markets, where we’re seeing a greater proportion of vacancies. Invariably these places are on the doorstep of bigger, stronger markets.”
Bowles conceded that retailer failures had taken some competition out of the market and HMV had snapped up 32 former Zavvi stores while its Waterstone’s brand will benefit from the closure of Borders. But he believes empty stores benefit nobody in the long run. “Consumer confidence is affected by vacancies,” he said, “there’s not the choice there used to be.”
And are there more closures to come? Prof Barry Gilbertson, partner at PricewaterhouseCoopers, believes it is inevitable. “We’ve seen various retailers going through the CVA and pre-pack processes, some for a second or even a third time,” he said. “If a company’s failing for a third time you have to ask yourself ‘is there something fundamentally wrong with its business model?’”
Pre-pack administrations have been criticised as a means for unscrupulous businesses to walk away from their liabilities and to cherry-pick the parts of the business they thought were profitable. But Gilbertson defended the process. “At PWC where we have dealt with pre-packs there’s already been a lot of marketing that’s gone on below the radar screen,” he said. “It doesn’t happen until the company has been truly exposed to the market although that process is often protected by confidentiality clauses.”
And he added: “There are good reasons why the banks often prefer to see a business bought back by its management rather than by a third party – at least they know the business.”
Other companies are going down the CVA route, a process that is becoming more controversial among landlords. “We agree with the BPF that this needs to be revisited,” said Hammerson’s Hutchings. “It discriminates between creditors and it’s principally aimed at landlords as a tool to renegotiate leases.”
But he did concede: “We’re more positive about CVA’s than prepacks. At least it gives us a vote while the prepack is conducted behind closed doors.”
And HMV’s Bowles pointed out that the process is equally unfair to retailers. “I don’t think it gives a level playing field,” he said. “Ultimately the ability to get out of liabilities doesn’t give everyone the same opportunities in the marketplace.”
However he did detect some movement on lease terms obtainable in the market. “We are seeing a new willingness among landlords to work together with retailers,” he said. “For many the key now is just to get cashflow, so we are seeing more flexibility.”
Monthly rents were trumpeted as a key concession that landlords could make to help their occupiers, but Hammerson’s Hutchings says take-up has been light. “The BPF and the BRC agreed that monthly terms would be available on all new leases, and where retailers could demonstrate hardship it’d be available on existing leases,” he explained.
“We wrote to all of our smaller tenants asking if they’d like to take this offer up, and only 14 out of 74 bothered to reply. And we’ve only been asked for it on a handful of new lettings.”
PWC’s Gilbertson gave a different perspective. “From the valuer’s point of view moving from quarterly to monthly terms dramatically increases the risk,” he said. “One of the reasons rent has been collected quarterly is that it gives the landlord a bit of a cushion if a retailer
does fail.”
And he pointed out that there was also an impact on a property’s yield. “Changing the cashflow and the risk profile affects the capital value of a property,” he said, “And in some cases that could put a property in breach of its loan covenants.”
So what else can be done to improve the retail landscape? Hutchings said Hammerson and other big mall owners are always on the look-out for new fascias to inject variety into their tenant line-ups. “We proactively encourage new retailers,” he said. “For instance we also have a French business and we work closely with our French colleagues to bring some of their retail tenants over. And over the past ten years we’ve spent time and money encouraging US retailers to set up here.”
He said this approach has had a “fair degree” of success. For instance Abercrombie & Fitch chose Brent Cross for its first Hollister store, and Hammerson has more Apple stores in its portfolio than any other UK landlord.
“There are others that we’re talking to but it’s a long, slow burn,” he said. “The lower cost of entry is making the UK more attractive at the moment.”
Hammerson also now encourages pop-up shops, where once it would have rejected them. “They are a fascinating opportunity,” said Hutchings. “We had Fred Perry and Cath Kidston at Spitalfields. In some ways we’re beginning to see voids as an asset.”
And HMV’s Bowles is also a fan of the pop-up phenomenon. “HMV opened ten in the run-up to Christmas,” he said. “They’re a great opportunity and they needn’t affect the overall feel of a centre.”
But prof Gilbertson asked: “Do local authorities have the financial muscle to do that sort of thing on the high street?”
And he finished with a warning. “Our view is that between 18 and 22 per cent of the high street stock will never be reoccupied. Those sites are going to have to be reused for some other purpose.”
