Retail apocalypse getting darker for UK landlords

London

THE collapse of mall landlord Intu Properties is about to send shockwaves through a sector that is already reeling.

Nine of the UK's biggest shopping centres could potentially be sold into a market that had already seized up before the coronavirus struck.

With the tenants of those properties paying only a fraction of their rent as the pandemic deepens a prolonged retail crisis, the risk they are sold at knock-down prices threatens to further sink the values of malls nationwide.

That, of course, all assumes one key factor: somebody wants them in the first place.

"The buyers of these assets will pay a yield that reflects the increased credit risk, the increased obsolescence, increased vacancy and reduced footfall," said Andrew Jones, chief executive officer of LondonMetric Property.

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"Tomorrow's rent is a lot lower than today's, so the price will reflect a new paradigm - it's a pretty scary outcome."

Retailers paid just 36 per cent of third-quarter rent due last week, compared with 41 per cent on the collection date three months earlier, showed data from Remit Consulting that was released on Thursday.

Hammerson, which owns about a dozen large UK malls, said on Wednesday it had so far collected just 16 per cent of third-quarter rents that were due last week on its British properties.

Once a reliable source of cash flow, malls and stores have become a major drag on the share prices of landlords including British Land and Land Securities Group.

The arrival of Covid-19 has only piled on further doubts about the assets' future, as the outbreak accelerates a shift to online consumption that was pushing brick and mortar retailers to the brink even before they faced months of forced closure.

The meagre rent payments are a grim indicator of how many retailers will actually survive the crisis, according to Rob Virdee, an analyst at real estate research firm Green Street Advisors.

Furniture chain Harveys and the UK arm of Victoria's Secret are among those that were placed into administration in the past month.

Even those that avoid bankruptcy are slashing their real estate footprint. Shirt maker TM Lewin plans to close all of its brick and mortar outposts and cut 600 jobs as it moves online, while John Lewis is planning to close some of its 50 department stores, the Evening Standard newspaper reported on Wednesday.

"It is virtually every day that we get another administration," LondonMetric's Mr Jones said. "I'm not interested in the current rent because I have no confidence that rent is going to stay the same."

Landlords are having to work harder to maximise their rent collection figures. Most have switched to monthly rents and are agreeing to deals with individual retailers offering a range of solutions, from rent holidays in exchange for lease extensions to long-term repayment plans.

But it is clear the balance of power has shifted. Pepco Group, owner of the Poundland value chain, said last month it had re-negotiated the leases on 76 of its stores and secured rent cuts of more than a quarter.

Furthermore, a government decision to extend restrictions on tenant evictions has not encouraged retailers to pay what is due, Stifel analyst John Cahill wrote in a research note.

Even retailers that remained open through lockdown, such as Boots drugstores, withheld some rent payments.

Recognising the threat of widespread retailer failures on landlords and their lenders, the government announced on Tuesday that it would relax planning laws, making it easier to convert stores for other uses.

Many owners of stores and malls are already looking at ways to convert them into apartments or even warehouses to capitalise on the explosion in online shopping - anything but stores.

NewRiver real estate investment trust is working up plans for about 232,000 square metres of development projects across its existing portfolio of malls and stores, its chief executive officer Allan Lockhart said last month.

Intu had already begun drawing up plans to build homes around some of its properties before its collapse. Cashed-up real estate companies or private equity firms with deep pockets will likely be looking at the firm's properties in the same way.

The long-suffering landlord called in the administrators on Friday, as the pandemic shut off rescue options including a capital raise to reduce its £4.5 billion (S$7.84 billion) debt pile.

Talks to stave off the company's collapse failed against the backdrop of a looming half-year valuation of its properties that most lenders expected to result in another severe hit.

In the current environment, a price is anyone's guess. Investors do not believe major landlords' own mall valuations, with firms' shares trading at deep discounts to the stated value of their assets.

"We are closer to the bottom now, it's just whether or not the bottom has moved," Mr Jones said. "Trends that were taking years to play out are now taking place in weeks or months." BLOOMBERG