The ties that bind retail and property fortunes

Tuesday, July 12, 2011
6:08 PM

Back in the days when credit was cheap and easy and the housing bubble was expanding, when ministers declared with some confidence the abolition of boom and bust, retailers had plenty to worry about.

First out of town developments began to change the face of the traditional high street. Then the supermarkets started to look beyond groceries into fuel, consumer goods, books and clothing.

Then came the internet and the rise of e-commerce that plays to that very basic consumer instinct: shopping around for a bargain. Forget the need for a computer, if you have a smart-phone, you can buy anything from a takeaway to a piece of furniture at any time, wherever you are.

Who needs to wait for the shops to open?

The social experience of shopping –where, when and how it happens – has been changing for the last few decades.

But the recession and oh so fragile recovery has added two particularly toxic ingredients: flattened consumer confidence and rising inflation.

Or at least, rising inflation until last month.

Figures published yesterday revealed an unexpected fall in the Consumer Prices Index (CPI) to 4.2pc from 4.5pc in May.

According to the Office for National Statistics (ONS), the price of anything from computer games to digital cameras and televisions tumbled as retailers tried to move stock.

Another significant faller was clothing and footwear as summer sales began early, especially in women’s shoes and fashions, where prices fell 1.9pc from May.

The falls offset another sharp rise in food costs in June, with prices up 0.9pc month-on-month to make an annual increase of 6.9pc. Increases in June were across the board but especially in essentials such as bread, cereals, meat, milk, cheese and eggs, squeezing household incomes even harder.

The latest retail sales published yesterday also showed a modest improvement in trading conditions.

But the British Retail Consortium (BRC) said the true picture was masked by a minor revival in non-food sales driven by price cuts and clearance events.

“Given June’s spate of shop-closure announcements and weak company results, these figures are not as bad as they could have been, but it shows just how tough times are when total sales growth of 1.5pc is regarded as not that bad,” BRC director general Stephen Robertson said.

Some of the best-known brands on the high street have succumbed to this combination of social and economic trends.

Some have ended up in administration – think of Bennetts earlier this year being bought by Hughes.

Others – including major national chains – have been closing stores at a steady pace.

Research compiled for PwC by the Local Data Company (LDC) found that an average of 20 stores a day were closed nationwide between January and the end of May.

The data revealed that across multiple retailers in 300 town centres, clothes, shoe shops and jewellers have been among the worst affected. But supermarkets, convenience stores and cafés bucked the trend, showing growth in the first half of 2011.

According to PwC, since the start of the recession, financially-troubled retailers have closed or plan to close on average half of their store portfolios, as the high street comes under increased pressure.

PwC examined the announcements of eight high-profile failed or struggling high street retailers and found that on average 51pc of the total store portfolio has, or could be, closed.

One other trend appears to be the chains opting for fewer stores, but retaining their larger outlets. Pulling in the opposite direction is the trend for supermarkets to develop their network of smaller “convenience” stores.

But decisions about closures do not just affect the retailers themselves nor just their employees.

As Stephen Oldfield, PwC’s East Anglian advisory partner, explained affects will also be felt by property owners such as pension funds, institutions and property companies and private individuals who have invested in retail property.

“Tenant default is the biggest risk facing property companies, who may be unable to service their bank debt,” Mr Oldfield said.

“If a tenant goes out of business it could take two years or more to find a replacement tenant, who will probably demand a rent free period (of up to 24 months or more) or a capital contribution for their shop fit-out when they sign their new lease.

“These vacancies will mean the landlord has no rental income but will also have to pay out on empty rates, service charges, insurance and security of the premises. This is not a good outcome for the property company or their bank as it not only damages the cash flow but also the capital value.

“Additionally, there is likely to be increasing divergence in yields on prime and secondary property and this will affect loan to value covenants which banks will need to address, especially where a landlord’s cash flow is challenged either by tenant default or failure.

“If they can, landlords would be well-advised to reach a solution with their tenant that keeps the occupier trading.

“Sadly, for property companies who own retail property there is a real risk of more tenant failure in the second half of the year.”

The pain continues to be felt by retailers and property companies, as PwC’s latest retail insolvency statistics for the second quarter of 2011 show that there were 375 retail insolvencies – 9pc more than the same time last year.

Mr Oldfield added: “We expect high street rentals to continue to fall and vacancy rates to rise in the short -term. There appears also to be as structural shift taking place with a more fragmented range of users within town centres such as hairdressers, beauticians, convenience stores and restaurants. This is likely to make it harder to create a sense of destination. The covenant and sustainability of some of these retailers is also likely to lead to higher yields.

“All this is likely to create greater divergence between primary and secondary yields and potentially make some tertiary property unlettable in its current form. Property owners holding secondary and tertiary property therefore face challenging times”.

But the LDC figures also suggested that the number of store closures in the six counties of the East of England had been counterbalanced by an equal number of store openings. In the neighbouring South East and in Greater London, closures exceeded openings.

But the South West, North West, East Midlands, and Yorkshire & Humber all saw net increases in the number of stories trading.

But the research confirmed that where jewellers and bookshops once stood, you are as likely to find a café, convenience store or even a pawnbroker. The face of the high street is still changing.

Mr Oldfield predicted: “Retailers will continue to struggle for the next six months and we will see high levels of financial distress among certain retailers such as clothes shops.

“The combination of rising inflation and dented consumer confidence has led to people increasingly trying to find the best deal online. This has made life difficult for store-dependent high street retailers who have seen a drop in sales and reduced footfall. Retailers cannot afford to bury their heads in the sand, and must think about surgery before the problem becomes terminal.”