Debenhams hit the headlines recently with their full year results in which they posted near £500m losses and announced an intention to close 50 stores over the next five years. Once the anchor to most towns, a long lease to Debenhams would have been considered secure and valuable; today, many landlords are faced with an uncertain outlook many wouldn’t have predicted a few years ago.
Over the next few months, we will explore leasing structures and to what extent landlord and tenant relationships could respond to the changing retail landscape to survive.
Unlike the office sector where different lease structures have emerged – traditional lease, serviced, managed, co-working etc. – retail predominantly falls into two categories, traditional FRI leases and short-term leases for trial purposes, or for independent brands.
Long leases were borne out of an age when shops were the single point of sale. Brand loyalty was high, fashion trends and product lead times were slow, consequently retailers operated in a more predictable environment. Consequently, security of tenure under long leases was actively sought by retailers, none more so than the “something for everyone” department store found in most towns. 25 to 35-year leases were the norm and retail property as an investment was considered a “safe bet”, characteristically commanding the lowest yields of all property sectors.
Globalisation of retail and the impact of the internet has meant that the sector has adapted to become more nimble and innovative than ever before. Retailers that did not embrace change fell behind and some failed (including cherished brands) and retailers’ commitment to even the best shopping centres in the UK has shortened from a 15 years term certain to typically five with break clauses now widespread.
Throw in a rates revaluation, introduction of the living wage, a need to invest heavily in digital sales, and retailers’ cost bases have become bigger and more inflexible than ever before. So, it’s no surprise that the long lease no longer fits the retail model. But the ever-shortening lease terms and pressure on rent threatens not just current investment value but also long-term investment viability leaving us to ponder– will future capital investment pay off when income is becoming less predictable?
One area of the UK retail market where landlords and brands have worked in partnership since inception is outlet retail, and in the last ten years outlets have far outperformed traditional retail in terms of income and capital value.
The market dynamics of the sector are slightly different from other retail sectors, not least the material increase in brands wanting outlet stores as the sector’s reputation has improved and gained popularity with customers. However, the fundamentals around landlord and tenant partnership (turnover rents, frequent right-sizing and refreshing of the brand mix), are more aligned to and surely therefore more future-proofed for further changes in consumer trends.
My next blog will delve into examples where innovative leasing and landlord-tenant partnerships are being embraced and the resulting benefits and challenges.