Analysis: How coronavirus will change retail rents forever

On March 25, retailers’ quarterly rent was due and the timing couldn’t have been worse – for both occupants and landlords.

Less than 48 hours before, in a televised address to the nation, prime minister Boris Johnson had ordered the nation into lockdown to try and stop the spread of the coronavirus and lessen the load on the NHS.

As part of these measures, Johnson ordered that all non-essential retailers close their stores and people were advised not to leave their homes unless for exercise once a day or to buy essentials goods, such as food.

With stores accounting for the vast majority of retail sales, businesses were forced to cut all capex – and many, such as Primark, Superdry and JD Sports, went so far as to withhold rent payments.

The amount of rent received on or after the rent due date was historically low. Embattled Intu, for example, received only 29% of rents from retail occupants across its sites on rent day. To put those numbers into perspective, on the same date the previous year Intu had received 77% of rents.

Intu, which had already seen the value of its shopping centre portfolio plunge £2bn in 2019, has been talking to lenders about waiving covenant to offset its debt commitments

Rival landlord Hammerson fared slightly better. It said it received 37% of rents due for the second quarter of the year on March 25 and was grappling with “a variety of requests for rent deferrals, monthly payments and waivers” from occupants.

All of this has left some landlords staring into the abyss, with Intu, which had already seen the value of its shopping centre portfolio plunge £2bn in 2019, talking to lenders about waiving covenants to offset its spiralling debt commitments. 

But many retailers who have had their sales obliterated believe that landlords need to share the financial burden with them to avoid a swathe of their occupiers going to the wall.

Rent holidays and withheld payments

PureGym chief executive Humphrey Cobbold says the lockdown has been a crushing blow to his business. As a gym operator, PureGym effectively drew all of its revenue from its physical space. Suddenly faced with the prospect of no money coming in, he has had to quickly find ways to stop money going out.

“We’d built this business up over 10 years and had to close it down in 10 hours. It’s a pretty painful situation. To put it into context, heading into this our cash burn rate was around £10m a week. That really focuses your mind as a business manager,” he says.

Once the “painful” decision not to pay its quarterly rents was made, Cobbold says PureGym wrote to all 230 of its individual landlords explaining why and asking to have discussions about how best to proceed.

“You can’t have much of a negotiation or discussion with landlords if you’ve just sent them the thick end of £10m worth of cash,” he says.

“Our proposal was that we’re a good tenant now, we’ll be a good tenant in the future and they should have the good grace to grant us a three-month rent-free period.”

PureGym has not been alone in requesting rent holidays over the past few weeks. The likes of Superdry, New Look and Debenhams all made similar requests. Other retailers have not requested rent holidays and instead have simply withheld payment. These include Primark, JD Sports, Arcadia and Kingfisher.

“We’d built this business up over 10 years and had to close it down in 10 hours. It’s a pretty painful situation”

Humphrey Cobbold, PureGym

Cobbold reasons that over a typical 15-year PureGym lease, the landlord would still receive 177 rent payments out of 180, which “is a good deal, given the fiscal tsunami that has hit us”.

A minority of landlords have been supportive, says Cobbold. The majority either have yet to respond or are in discussions around possible remedies, including deferring payments to a later date or tacking any missed payments now on to the end of an existing lease.

Cobbold says while rent holidays would be preferable, “deferments are better for us now than paying in full”.

Needless to say, not all landlords have been so understanding.

Your rent or your livelihood 

A group of landlords replied simply: “Sorry to hear that, but it’s not really our problem. Pay your rent, or else,” says Cobbold. “It’s disappointing, if not entirely surprising.”

While the government in its recent coronavirus bill effectively suspended landlords’ ability to pursue lease forfeiture on tenants for the duration of the lockdown, there are still routes available for landlords to demand rents.

They can pursue statutory rent demands against tenants, giving them 21 days to pay after which point they can issue a winding-up notice. This recourse exists under the Insolvency Act 1986 and could lead to an occupier’s bank accounts being frozen, even if this was pursued by only a single landlord.

There is also a commercial rent arrears recovery process, by which landlords could recoup the value of missed rents by effectively seizing a tenant’s property and goods from a store.

One property source points out that Criterion Capital, owned by Times Rich List landlord Asif Aziz, has been threatening to take such action across its portfolio.  

Cobbold says other landlords have also threatened occupants with these tactics. “We could probably work through these,” he says. “But think about the smaller traders who can’t get access to lawyers. They’d be left with only two options: pay up or be wound up and not be able to pay their bills. They’re really over a barrel.”

Landsec chief financial officer Martin Greenslade says while the landlord hasn’t explored these options with occupants withholding rent, the fact remains that existing rental agreements are binding and those that can pay must pay up.

For its part, Landsec unveiled an £80m relief fund for struggling, smaller tenants on its schemes at the beginning of April. However, Greenslade says that the landlord cannot afford to support every one of its tenants.

“Our shopping centres are communities and we want to help people through this situation. To do that requires retailers that are well capitalised to play their part and pay us in full and on time because we can’t support everyone indefinitely”

Martin Greenslade, Landsec

“Our shopping centres are communities and we want to help people through this situation so, once we come out of lockdown, we can return them to the great destinations they were before.

“To do that requires those retailers that are well capitalised and larger to play their part and pay us in full and on time because we can’t support everyone indefinitely.”

Deloitte head of retail property strategy Hugo Clark has sympathy for shopping centre owners, pointing to the plight of the likes of Intu as an example of the problem many landlords are facing. 

“There’s a difference between being aggressive and just trying to do everything they can for their stakeholders to pursue their revenues as they should,” says Clark.

“There are support packages available for retailers. There’s not an equivalent support package available for landlords at present. Landlords are bearing the brunt of tenants who can’t pay the rent. They don’t have bottomless pockets.”

Accelerating change

Retail property expert Jonathan De Mello says the coronavirus epidemic is simply speeding up the pace of change in retail property.

“This is exacerbating trends we were already seeing anyway. Things like the move to monthly rents. In the past landlords and valuers preferred the rents to be paid quarterly in advance because it’s a bigger income boost for landlords.

“Now though, retailers’ cash flow has been hit so hard that even when we come out of this most retailers won’t be able to afford to pay quarterly rent upfront in advance. It just won’t be possible.”

The trend towards monthly rents has been led by the likes of Swedish fashion giant H&M, which has asked to pay rents at the end of each month, rather than quarterly in advance.

Mike Ashley-owned Frasers Group is another that has pushed for a move to monthly rents since the coronavirus epidemic struck and Cobbold says PureGym’s new leases are signed on such terms. 

De Mello believes that more retailers will look to put in place “coronavirus clauses” – essentially break clauses in future agreements that will allow retailers to end a lease if revenues don’t return to a certain point once the store reopens after the lockdown.

H&M has recently begun inserting such clauses into leases. Retail Week understands that Edinburgh Woollen Mill, the retail group owned by Philip Day that operates brands such as Peacocks and Jaeger, has also been making this request of its landlords for new Bonmarché leases.

A spokesperson for EWM says: “Where we are currently signing new leases for Bonmarché stores, we have agreed with landlords a new pandemic clause.

“The upshot of the clause is that new leases will start only when the stores can reopen and restrictions due to coronavirus are lifted.

“This was mutually agreed between Bonmarché and landlords so that new leases could be signed during this unusual period.”

Cobbold expects average retail rental lease terms to come down and more break clauses to be inserted post-coronavirus. While the typical PureGym lease is 15 years, given the high fit-out costs associated with each site, Cobbold says that timeframe will drop or will be signed with a 10-year break clause in future.

Clark can also foresee an increase in turnover-based rents between occupants and tenants. “I hope to see a move towards greater partnerships between landlords and tenants,” he says. “And more focus on affordability.”

Meanwhile, consumers are becoming increasingly au fait with online shopping during lockdown, which could accelerate ecommerce sales and lead to even lower sales densities from bricks-and-mortar stores. This, in turn, will lead to retailers demanding lower rents from stores.

“I hope to see a move towards greater partnerships between landlords and tenants and more focus on affordability”

Hugo Clark, Deloitte

Against this backdrop, some landlords have understandably moved away from retail. The coronavirus epidemic has accelerated Landsec’s move to further reduce the amount of secondary retail in its portfolio – currently 38% – and refocus on office space in London and the South East in the long term.

As the likes of Hammerson and Intu have both done, Greenslade also says Landsec has looked at reducing service charges for occupants in its centres during the pandemic.

Fundamentally, however, Deloitte’s Clark believes the existing retail rental model doesn’t work. He says: “There’s a disconnect – not deliberate or malicious – but a disconnect between the way the market works and the economic productivity of that space.”

“The only good to come of this is that landlords and tenants are talking to each other and trying to understand one another’s business models. Understand the stresses and strains they’ve got in their cash flow and agree to leases in the future that recognise the need for there to be a linkage between rent and what the tenant can actually afford.”

The retail property model was – if not entirely broken – already straining at the seams before the arrival of coronavirus. The impact of coronavirus will sadly claim more retailers and perhaps even landlords, but it will also give impetus to both parties to rip up the old retail rents model for good.

A possible silver lining to what is an extremely dark cloud.