Landlords Staring Into Retail Abyss Need More Than a Vaccine

(Bloomberg) — U.K. retail landlords are facing a hard reality: the rapid approval of a vaccine has come too late for thousands of their stores.


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The collapse of department store chain Debenhams Plc and Philip Green’s Arcadia Group this week caps an unremittingly brutal year for the owners of brick and mortar stores. The demise of these retailers alone threatens 16.6 million square feet (1.5 million square meters) of real estate, according to data compiled by Radius Data Exchange.

Nearly double that amount of retail space has already been permanently shut this year in the U.K. — the equivalent of almost 500 American football fields.

Debenhams and Arcadia “were not so long ago considered anchor tenants,” said Rob Virdee, an analyst at real estate research firm Green Street Advisors. “The resulting large voids inside shopping centers will reduce even further the little negotiating power landlords still clung on to.”

Crisis enveloped the U.K.’s high streets well before the pandemic, but the combination of both has proved a lethal cocktail for retailers and landlords alike. Once the bedrock of institutional investors’ property portfolios, the reliable cashflow from malls and stores has become a dripfeed as lockdowns sped a structural shift to online shopping. More than 20,000 U.K. stores are forecast to close this year, predicts the Centre for Retail Research.

Women’s fashion retailer Bonmarche Ltd. also filed for administration Wednesday, putting more than 225 further stores at risk.

chart: Shutting Shop

© Bloomberg
Shutting Shop

The spike in vacancies has pummeled some of the biggest landlords: Intu Properties Plc collapsed in June after years of struggling under the weight of its debt; Hammerson Plc, the U.K.’s largest specialist retail landlord, was forced into an emergency share sale; and global mall giant Unibail-Rodamco-Westfield is scrambling for a new rescue plan after activist investors defeated management’s proposals.

Most of the biggest listed owners are exposed to Arcadia and Debenhams. Hammerson rents 16 stores to the former and two to the latter, according to Green Street. British Land Co. and Land Securities Group Plc, which own malls as well as offices, each have 10 Arcadia stores and 3 leased to Debenhams. The collapses just add to the firms’ woes: their stocks have tumbled this year, with Hammerson faring worst after slumping more than 80%.

Read More: What’s Next for Debenhams and Arcadia as U.K. Retail Reopens

The share-price plunges that have plagued U.K.’s real-estate companies since the start of the pandemic have lured a slew of bargain hunters, with private equity funds snapping up stakes in companies including Great Portland Estates Plc and British Land. U.S. investors, led by private equity firms sitting on vast piles of ready cash, will spend about $10 billion on U.K. real estate next year, according to a September report from broker Knight Frank.

So far, they’re steering clear of retail — despite the large discounts on offer. A large U.K. shopping center has yet to change hands this year, while Intu failed to find backers for a rescue bid. Still, the breakup of Intu and the sale of its assets including the Trafford Centre in Manchester will provide a litmus test for the depth of demand. The mall’s sale process has so far failed to lure bids above the level of the debt secured against the property, Bloomberg reported last month.

Publicly traded U.K. retail landlords covered by Green Street have seen total returns down 47% since February, the worst of any property type. A rare bright spot has been warehouses, where landlords have benefited from a boom in demand from retailers selling online, delivering gains of 5% even as the pandemic hammers the wider economy.

“The virus has accelerated everything,” said Andrew Jones, chief executive officer of landlord LondonMetric Property Plc, which used to invest mainly in retail but switched to warehouses several years ago. “We’ve seen several years worth of value destruction condensed into a few months.”

(Adds Bonmarche administration in 6th paragraph)

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