INTRODUCTION
UK retailers are up against it. Amid the toughest trading
environment for decades many retailers are fighting for survival.
As each week goes by it seems as if a new household-name retailer
collapses -- the victim of a slump in consumer spending and growing
competition from online rivals and supermarkets.
In the past few months Jane Norman, TJ Hughes and Habitat have gone
into administration, while other chains are closing stores, putting
thousands of jobs at risk. Experts warn that more retail
insolvencies are to come as retailers face 'High Noon on the
High Street' as one newspaper put it.
Mary Portas -- the high-profile retail consultant appointed by the
government to try to lead a review into the future of the high
street -- faces one of her toughest challenges yet.
Property directors at retailers and their landlords will play an
important role in revitalising the high street. Property costs can
account for anywhere between 10% and 40% of a retailer's fixed
costs, according to the British
Retail Consortium, making its cost second only to a
company's wages bill.
This White Paper analyses the big issues in the UK retail property
market including rent costs, the impact of online retailing stores
and the challenge of finding the right store.
We have talked to property directors, consultants and landlords at
leading companies ranging from Evans Cycles to Subway about the
state of the retail property market. What are they worried about?
How can retailers manage their property assets more effectively?
And what should government and councils do to help?
MAIN PART OF WHITE PAPER
The restaurant sector
Trevor Haynes, area development manager,
UK and Ireland, for Subway, the sandwich chain, is
concerned about rent costs. To help retailers manage their property
budgets they should be allowed to pay rent monthly rather than
quarterly, the standard arrangement now, he says.
"Monthly payments may enable a business to budget more
accurately and ease cash flow for franchisees."
But it will take more than flexible rent payments to boost UK high
streets, many of whom have lost business to out-of-town shopping
centres. The government needs to find ways to generate traffic on
our high streets. Reduction in parking fees may assist.
Haynes welcomes the government's recent appointment of Mary
Portas to review the future of the UK high street. "It shows
that first steps are being taken to re-energise our town centres
and to encourage shoppers to support local traders."
The closure of banks and post offices, and the lack of free and
accessible parking, have all played a role in the loss of some high
street communities. The government is right to be acknowledging
there is a problem and actively doing something about
it."
Other property directors in the industry talk of the challenge of
finding good sites for restaurants before rivals.
Take Kieran Pitcher, group property director of
Gondola, the owner of restaurant chains including Pizza
Express, Ask and Zizzi. He's responsible for managing a large
property portfolio -- 650 restaurants in the UK -- and finding new
sites. Gondola hopes to open 40 stores in the UK this year and 50
next year.
"The restaurant sector is hugely competitive at the
moment," says Pitcher. "Every one of our competitors has
a very aggressive [property] acquisition strategy. London and the
South East are so competitive compared to the rest of the country,
which is driving up rents by between about 10% and 20% a year,
although rents across the rest of the country are fairly
flat."
Another challenge is getting planning permission for new
restaurants from councils. "New restaurants can bring vibrancy
and employment to the high street but some planning authorities are
quite anti new restaurants," Pitcher says.
He acknowledges that planning authorities have to balance different
considerations when reviewing planning applications (for example,
the amount of noise a pub could create for neighbours in a
residential area), but calls on the government to make planning
laws more supportive for restaurants.
Online retail transformation
Technological developments, including the rise of e-commerce, are
also changing the UK high street -- and retailers' property
portfolios.
The growth of e-commerce over the past 10 years has transformed the
way many of us shop.
Despite the economic downturn European online retail sales grew by
18% from 2009 to 2010 and are expected to grow by 13% in 2011, Forrester Research forecast earlier this year.
In the UK, 10% of all retail transactions next year will be online,
Forrester has also predicted.
The UK is one of the most advanced e-commerce markets in Europe, as
consumers use the Internet as an adjunct to other ways to shop --
such as mail order and shopping the old traditional way by visiting
a store on the high street.
The change in consumer behaviour is an opportunity and challenge to
property directors at brick-and-mortar retailers.
Steve Pearce, client services director at Green
Room, a retail design and delivery practice, whose clients
includes Nike, Levis, and New Look, says: "The Internet is
becoming part of the shopping process. Often, shopping is not just
a simple journey of researching a product online and then going to
a shop to buy it. Sometimes people will go to a shop but end up
buying the item cheaper online from a different
retailer."
To attract web-savvy shoppers, property directors in the retail
industry can refurbish stores and introduce new services. Examples
of retailers using innovative store designs include grooming salons
at Ted Baker, the fashion retailer and Pave -- a Barcelona bike
shop in Barcelona, which displays bikes in back-lit boxes, a coffee
corner with a TV to watch races, as well as a library, and showers
which can be used after training.
"You need a reason to go into a store rather than buying
something online," says Pearce. "Persuading customers to
buy in a store is not necessarily about providing rows and rows of
products. It's also about how staff treat and serve
you."
Pop-up shops
One way to get customers through the door is through "pop
up" shops -- temporary shops, whose leases can last for weeks
or up to a year. Pop up shops have become increasingly popular with
small and large retailers. Pop up shops, often in vacant premises
on high streets, can be a good way to test a new product or
service, says Pearce. Brands without a high street presence, such
as online retailers, can also find pop-up stores useful.
"Pop up shops have been around for about the last six years
and are now getting quite ubiquitous," says Pearce. "They
are cheaper and a relatively low risk way of launching a product.
People feel like they are getting something quite rare and
exclusive when they visit the store."
Leisure
Leisure retail has always played a key role on the high street and two directors in this distinct retail sub-sector offer their views on what real progress could look like.
Neil Mackenzie, is a director of real estate for an
international retailer, with over 30 years experience in
retail property management. He oversees a portfolio of
approximately 100 stores throughout Europe including UK, Spain,
France and Italy.
Speaking in a personal capacity about the UK retail sector,
Mackenzie says that the main problem is not a shortage of retail
space in the UK "We don't need to keep adding to retail
space," he says. "The problem is that many available
units are too small, have restricted headroom or are held on
historic high rentals, which is why they're being left
empty.
Big shopping centres such as Bluewater in Kent or the Trafford
Centre in Manchester are going from "strength to
strength", while many high streets are in decline with a large
number of vacant shops, he adds.
If property units are not attractive to retailers, the government
should encourage property developers to convert or demolish and
rebuild the units so they can be used for another purpose,
Mackenzie says. "If a unit has no sensible retail future and
cannot be regarded as a retail or commercial development, then it
needs to be converted into something else such as a local community
facility, or even back into residential homes, as many town centres
started off."
Landlords could do more to support retailers by agreeing more rents
based on turnover, as is common in Continental Europe, Mackenzie
adds. Turnover-based rents mean that retailers and landlords share
the risks and rewards of retail, he says. "Some European
retailers are suffering worse than UK retailers due to higher
unemployment, but you generally don't see the same number of
empty units in continental shopping centres as you do in the
UK," Mackenzie says. "This is partly because the rents
and taxes tend to be lower than in the UK, and based on turnover.
Struggling to engineer ways to maintain historic rental levels and
keeping upward only rent reviews does not help to bring retail back
into use."
Mackenzie welcomes industry codes of practice for leases and
service charges which have been agreed by retailers and landlords.
But he notes that the codes are voluntary, which can mean that they
are of limited benefit as many landlords merely pay lip service to
them. "Retailers have no way of legally enforcing the
codes," he says.
Andy Hall is finance director at Evans Cycles,
a bike shop with about 44 UK stores. Property accounts for about 10
to 12% of the group's costs.
Evans' turnover is about £100m. About a quarter of its
sales are online -- mainly from clothes and accessories, such as
locks and pumps.
Evans has about 25 stores in London but finding new locations in
such a crowded market is a challenge.
"We don't need prime sites such as major shopping centres
like Bluewater, Hall says. "In London many of our stores are
in unusual locations. People come to where we are and get some help
finding us from our web site."
"Because we have so many stores in London there is a risk that
we cannibalise sales from our existing stores. Cities outside
London such as Reading or Leeds offer more opportunities for
expansion."
Growth in online sales may mean that Evans needs fewer stores in
the five or 10 years.
"Historically we may have thought we needed 100 to 150 stores
but in five or 10 years we may only need 75 stores to get national
coverage," Hall says. "We can use our web site to
supplement stores. It's very much a multi-channel business
model."
Financial change also looms over retailers such as Evans as
regulators finalise a new global accounting standard for leases.
The new accounting rule will put an estimated $1 trillion
(£620 million) of leased assets, including shops, on
corporate balance sheets.
Retailers, who will be heavily affected by the accounting change,
have raised concerns that the new rules are too complicated and
will increase their compliance costs.
Hall says that complying with the new accounting rule may be time
consuming but does not think that its business costs will be too
onerous.
Landlords and property advisers
For their part, landlords say that they are doing everything
possible to help retail tenants. Many landlords are struggling too,
of course. Increases in retail insolvencies and empty shop units
have meant less money for landlords.
Some of the property from failed retailers can be sold or re-let
but the recent spate of administrations is still expected to cost
UK landlords up to £393 million of rent payments during their
leases, according research published in July by PwC, the
professional services firm, and Investment Property Databank
(IPD) a property information company.
Multiple retailers closed an average of 20 shops per day in the UK
between January and the end of May this year as lower consumer
spending takes its toll on the high street, the research also
found.
Retail insolvencies increased by 9% per cent to 375 in the second
quarter of this year, with clothing stores, jewellers and bookshops
among the hardest hit, according to figures from PwC.
Tenant default is a major problem for property companies. When a
tenant goes out of business it can take two years or more to find a
replacement tenant, who will probably demand a rent-free period or
a capital contribution for their shop fit-out when they sign their
new lease, experts say. Vacant properties mean landlords have no
rental income, but will also have to pay out on empty rates,
service charges, insurance and security of the premises.
Mike Jervis, PwC insolvency partner and retail specialist, says:
"Retailers cannot afford to bury their heads in the sand, and
must think about surgery before the problem becomes terminal.
"They need to engage with their stakeholders early,
especially banks, landlords, credit insurers and their staff.
Through our work, we have seen a number of successful turnarounds
involving the use of consensual arrangements and early engagement
with banks, landlords and shareholders which have saved retail
businesses."
Nilesh Joshi, an asset manager at Deutsche PWM Global Real
Estate, which manages shopping centres across the UK, says
both landlords and their tenants are working together to get
through tough trading and economic conditions.
Landlords at Deutsche's real estate business are giving retail
tenants support in two main ways: by allowing tenants to pay rent
monthly rather than quarterly and by filling empty shop units by
waiving rent charges.
"If tenants are struggling we are happy to let them pay rent
monthly after talking to their accounts departments," Joshi
says. "Retailers find this easier to budget for. It's a
tough market and we're here to listen."
In order to fill empty shops landlords can allow temporary tenants
to use the shops rent-free, but pay business rates and services
charges. "Landlords want to get people through the door of
their shop unit, so temporary rent-free agreements like this are
quite common," Joshi says.
Bradley Smith, retail warehousing and leisure agent at
DTZ, a property adviser, says: "It should be in a
landlord's best interest to help struggling tenants where it is
feasible, to avoid incurring a void. However, clearly each case has
to be judged on its own merits.
"Every landlord's aim is to maintain but also maximise
their rental income, so any financial concessions in favour of a
tenant could reduce the landlord's financial return. Therefore,
the balance between keeping a tenant who's in financial
difficulty afloat by offering greater flexibility on lease terms
and losing a tenant needs to be found."
Landlords can provide financial support to tenants in various ways,
including "stepped rents" (a reduced rent is agreed for
the first year of a lease and is increased annually until it
reaches the market rate); rents based on turnover; and rent-free
periods.
Smith says that landlords have had to increase financial incentives
to tenants over the past few years. The incentives are an effort to
attract retailers to properties and keep them there for the
duration of the lease.
"Retail tenants are seeking longer rent-free periods to help
them justify the cost of acquiring new stores at a time of economic
uncertainty."
Big retailers are asking landlords for up to two years rent free or
a capital sum to the equivalent value in many cases, which then is
used to offset the expensive set-up costs of opening new stores, he
adds.
How can the government help property directors? Many retailers
would welcome longer leases, with less frequent rent reviews, any
increases in rent to be agreed when the contract is signed.
James Burt, director, national markets, at GVA, a retail property agent
and property adviser and the largest independently owned property
consultancy in the UK, says: "Competition for retail space is
fierce, but what I think retailers are finding hardest is finding
space at an affordable rent.
Many retailers would welcome more flexible leases, with less
frequent rent reviews, Burt says. Ideally any increases in rent to
be agreed when the contract is signed.
"Rents only tend to go up, probably by an average of two to
three per cent a year for the best locations. Many retailers are
finding it difficult to meet any increase in rent because of tough
trading conditions on the high street. Consumer confidence is low
so it's a struggle to get consumers to spend more money,
particularly for retailers that sell discretionary
products."
Burt, who finds property for retailers and leisure companies,
adds: "Retailers value certainty when it comes to rent. Some
retailers prefer to negotiate rent that goes up by a certain
percentage."
Business rents, which are linked to rental values, are another
worry for many retailers. "One international retailer that I
act for was shocked by the level of business rates in the UK.
Business rates are in effect another tax on property," Burt
says. "Retailers and property owners find it onerous if they
have to pay a full business rate for a period of time on an empty
property."
Post-recession, however, landlords and tenants have been more
willing to make to make concessions in order to agree a rent that
it economically viable for both parties.
"Much of the way the property market works hasn't really
changed for decades or even centuries," Burt says.
"However, in the past few years I've seen the introduction
of more flexible leases of about five years. Fifteen or 20 years
ago it was not uncommon for landlords to only let a property for a
25-year lease. Now 10-year leases are more the norm."
The last word
Head of Retail at Thomas Eggar LLP, Jacqui
Joyce, suggests that retail property directors and
landlords are trying to steer their businesses through a perfect
storm of weak consumer spending, high unemployment, growing
competition from online retailers, and increasing company
insolvencies.
Fortunately, retail property professionals are a resilient bunch,
Joyce adds. They are finding new ways to reinvigorate the high
street --whether through flexible rent terms, pop-up stores and
investment in online sales -- and make best use of their property
portfolios.
Joyce concludes. "The economic downturn has highlighted
weaknesses in the retail property market. The challenge for
retailers, landlords and government is how to learn lessons from
the downturn and rebuild the high street."
The contents of this article are intended as guidelines for clients and other readers. It is not a substitute for considered advice on specific issues. Consequently, we cannot accept any responsibility for this information or for any errors or omissions.
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