Retailers: beware the ides of March

Retail and leisure sectors face the daunting prospect of further Covid-related financial shocks in early spring, warns a commercial property specialist.
March 21, 2022
The government’s moratorium on landlord action for commercial rent arrears, aimed at giving businesses breathing space because of enforced closures, ends on Friday, March 25.

According to industry figures, there is a £7.4 billion shortfall in rents from occupiers.

Settling debts

Russell Miller, a partner at national property consultancy Vail Williams, said: “The Romans apparently considered the Ides of March as a deadline for settling their debts – two millennia on, the month takes on a similar significance here in the UK because of Covid-19.

“Landlords have been prevented from being able to evict tenants of commercial properties for non-payment of rent as a result of the Coronavirus Act 2020.

“When this comes to an end on March 25th, we could well see a flood of litigation against tenants and a potential rise in insolvency, which could further hinder the recovery of the retail and leisure sectors.

“Billions of pounds are owed in unpaid rent and it is anyone’s guess as to how much will be recovered. Some landlords will be under pressure from their own lenders to recoup debt.

“A mandatory arbitration process is in place to tackle debts accrued during closures but there will inevitably be cases where compromise is not possible, with bitter disputes.

“Some retailers and leisure-related companies with physical premises may have traded well enough to cover the backlog of rent with turnover but the Omicron variant will have reduced footfall in the significant trading month of December, further impacting upon ability to pay.”

Turnover rents trend

He added: “Whilst the retail sector did see a slight improvement in 2021, albeit from a fairly low base caused by the lockdowns in 2020, we expect to see yields continue to be quite soft in this sector as it remains a riskier prospect – not just because of the demise of the high street, but also because of the trend towards turnover rents from retailers.

“Rather than paying a static rent, retailers have, rightly, preferred to pay a rent which reflects their profitability.

“However, this has created enhanced volatility of income stream for investors, and with more uncertainty and volatility comes higher risk.

“Investors have shied away from paying more for that income stream as a result, with the exception of super-prime locations.”

Mr Miller, a registered property receiver and Chair of The Association of Property and Fixed Charge Receivers (NARA), said the pandemic had a dramatic effect on the property market last year – good and bad.

He explained: “Throughout 2021 we saw investors of industrial assets experience some fantastic returns in a near-zero interest rate environment as consumers switched to online purchases, creating strong demand for fulfilment warehousing and last-mile delivery premises.

“Meanwhile the office market experienced ups and downs as Covid came in waves, with retail languishing amid the continued rise in e-commerce.”

Office rents rising

Mr Miller said: “Investment prices for industrial assets have become eyewatering, but as interest rates and inflation rise, we could see this asset class plateau this year as the gap between yields and property risk narrows.”

The emergence of the Omicron variant at the end of last year had an adverse impact on the office market, as the government once again encouraged people to work from home.

Whilst this has knocked office confidence, Mr Miller says he expects this to rebound now that the work-from-home guidance from government has ceased, with office rents stabilising and even starting to increase as supply falls.

“We know, from what we are seeing on the ground that businesses continue to want to create a high-quality office environment to attract and inspire their staff, with a workspace rich in amenities and founded on flexibility, as the war for talent becomes the single biggest challenge that companies face.

“To help address this, particularly in light of the ‘Great Resignation’ as workers re-evaluated their jobs, businesses will continue to demand more creative, high-quality offices this year.

“This will drive office rents up – and with increasing rents comes more appetite to invest in the office market, as investment returns improve. This will be something we haven’t seen in this market for some time.

“Alongside the continued evolution of the office market in 2022 will be the ongoing debate which surrounds the future of our town centres.

Clicks and mortar

“What are they going to look like, how are our town centres going to work in light of the continued demise of retail and recent changes to permitted development rights?

“Whilst some people went back to our town centres and returned to their former shopping habits in 2021, omicron will undoubtedly have impacted this trend in recent weeks.

As a result, we are likely to continue to see structural changes in retail as the trend for online shopping, which accounted for 28% of retail sales last year, continues to increase.

“We could see a shift towards more of a residential and leisure provision in our town centres, with a focus on experienced-based shopping; we are closely monitoring how this trend progresses and what it will mean for the town centre investor.”

Mr Miller said: “With so many big questions for 2022, without considering potential curve balls like Omicron V2:0, we advise investors to stick by their basic principles of investment this year.