With covid-19 damaging an already struggling retail industry what could be next for retailers’ share prices and what does the changing nature of the high street and shopping centres mean for the big listed landlords?
Share prices would indicate shareholders are not confident about the prospects for landlords with a large exposure to retail clients. Covid-19 has pushed heavily indebted Intu, owner of the Trafford Centre, over the edge into administration. Even better-run rivals such as British Land with less retail exposure have had their share prices hit hard. This year so far, British Land shares are down 40%. The shares haven’t recovered in the same way as other companies since the March lows; indicateing less confidence in a recovery – something which is understandable.
The impact of coronavirus
The changes bought about by covid-19 have hastened the demise of purely physical, offline retailing. A company like Primark, owned by AB Foods, which has eschewed having an online presence was particularly hard hit when shops were closed. It could continue to be hit financially as social distancing measures stay in force and more customers prefer to shop online; notwithstanding the fact that when Primark’s shops did reopen people were camping outside to get in. Overall though it’s popularity doesn’t mask the fact that like most other retailers it’s suffering even more now before the virus.
The challenges in the industry could bring about long-term change. 79% of property owners throughout the UK who own more than 120 million sq ft of UK retail believe that the Covid-19 pandemic will bring permanent changes to how retail property is leased and the terms on which it is occupied. This has implications for landlords.
Figures from landlord Shaftesbury in June show just how bleak the picture is right now for landlords. The owner of property in central London, including China Town, swung to a £287m first-half loss, as its property values fell.
The situation is potentially getting worse. Data collated by Re-Leased has shown retailers had paid just 15% of next quarter’s rent by last Wednesday’s payment deadline.
The government may be tempted to offer bailouts, especially to retailers, but Jeremy Warner in The Sunday Telegraph makes the case against this. He argues that a line has to be drawn somewhere on debt and not having taxpayers take on bad debts.
The collapse of retail – at least in malls and on the High Street – is hitting landlords and their tenants but could there be hope in the evolution of the industry? Could new winners yet emerge from the ashes of Intu and Victoria’s Secret?
What could the future have in store?
The coverage in the media suggests that power is moving from the landlord towards the retailer. This is I know a simplistic analysis but at the current time there are indicators that show this is the case. Retailers not paying rent being a case in point. Listed landlord Hammerson was only able to collect 37% of rent due between 2 March and 30 April.
In future it looks like there might be a move towards turnover-based leases which obviously ties the tenant and the landlord closer together and would make landlords’ revenues much lumpier. Frasers Group (owner of Sports Direct) and H&M are amongst retailers looking into this option to reduce the burden of high rent bills in shops with declining footfalls.
From a retailer’s perspective I think the only option is to move online or into omnichannel retailing. Where a retailer makes the most of all customer touchpoints, both online and offline. Next has already made this move. It’s interesting because it’s allowing other companies and brands to compete with its own products on its digital platform – LABEL. This is growing much faster than Next’s own brand website, although for now, it’s also much smaller. In opening itself up as a platform, Next hopes to build the most compelling range of products available on a single platform so that it becomes a destination that shoppers visit first, and regularly.
A failure to embrace online likely leads to a retailer failing in the modern age. Just look at Debenhams as an example of a retailer that failed to move quickly enough with the times. I think if you want to invest in retail then the focus has got to be on those companies with a significant online presence.
The future for landlords seems to be more and more about owning big boxes – the warehouses that help retailers quickly fulfil online orders. REITs such as Tritax Big Box and Segro have done well in recent years. This seems to be the best part of the market to be in as it taps into the move to e-commerce.
Are landlords doomed?
I don’t think most landlords are doomed. Property is a tricky industry but some of the bigger players, like British Land, are shifting away from retail. It has stated it wants to move from 35% retail to 25-30% in the next five years. The development pipeline shows it’s more focused on offices, residential, leisure and mixed-use. Although a move to offices also comes with its own problems depending on behaviour change that follows the pandemic. Will companies keep big offices if working from home is popular, profitable and efficient?
Retailers had been using company voluntary arrangements (CVA’s) before coronavirus. That threat still exists and is likely to get worse. Hammerson, for example, had to negotiate rents on half its UK flagship stores as a result of CVAs.
I expect the evolution in retail to take some time to develop and then to get used to. It’s likely though in my opinion that there’ll be demand for shops and offices in prime locations. The industry I think is moving to quality over quantity and more diverse use of spaces. Expect mixed-use places/buildings to become increasingly common and the use of experiential to entice people to buildings and areas.
What does it mean for investors?
For investors, on the face of it, there is an appeal in both industries from a value perspective. Shares look cheap, and down the line could provide income if conditions improve. However, I think it’ll be a long time before the environment for landlords becomes anything like normal. For retailers, their problems are systemic and pre-date the virus. As such they are always likely to sour the perception of big landlords that have a retail customer base – like British Land does.
Landlords and physical store retailers are somewhat tied together and neither is anything other than a risky investment. I’ve never been very keen on retailers and I’ll personally be staying clear of the shares – even of those like Boohoo which have done very well by being online only. When it comes to landlords I’ll take a wait and see approach. It may be that they find clever ways to evolve, similar to those I’ve outlined above but for now the shares feel like they are really under pressure.
I wouldn’t recommend shares for either income or growth and for me they are not the most obvious investments. They are both more a play on how quickly the economy can recover from coronavirus and the lockdown. Long-term there’s still a lot of challenges for retailers and their landlords.
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