“It’s like kicking a sick dog,” said one young analyst working at a major US fund this week at the Freehold drinks party (see below.) “They can’t get up without help.” We were discussing the inadvisability of landlords putting the boot into retailers for using CVA’s to slash rents. The full horror of what’s happening is not covered by House of Frazer closing 31 of its 59 stores. Nor is it the news that the that John Lewis won’t make a penny this year. No, the horror is that outside prime islets rents could be 30%-50% below where they are now in five years. Last week Carpetright said it wanted a 30% cut on 82 of its best stores, plus a 50% cut on another 31 outlets – and of course no rent on the 81 stores closing. Revalue retail portfolios on anything approaching these base rent assumptions – and blanche. There must be a better way? There is, says one expert: stop kicking retailers and accept a share of their fortune/misfortune.
“We are out of step with the rest of the world” says Martyn Chase, former president of the British Council for Shopping Centres, now renamed REVO. “Retail landlords need to have a proper business relationship with their tenants,” feels Chase, who was senior partner at Donaldsons, now part of C&W. “You are bound to work together if the rent is part-based on turnover.” The majority of UK retail leases are simple fixed lump sums per month, although some global retailers like H&M, Zara and Uniqlo have forced landlords to accept all or part of the rent based on store turnover. Might it not make long business sense for landlords to offer part turnover/part base rents to all retailers? Better to have skin in the game than to be flayed by a CVA. Head-scratching over the complexities of including on-line turnover and lobbying for Amazon taxed is fine. Leave that to REVO and the Daily Mirror and Daily Mail. In Monday the front page of both tabloids screamed “save our high streets.” Meanwhile, for landlords, Rome is burning.
Turnover rents are no easy option. Charlie Barke, Head of Retail Investment at Knight Frank says “values could be impacted by 5-10% at day one, at least until the turnover income had been proven through several years of consistent trading data. Take a typical example. Let’s say you have got £1m of income, 100% from base rents, guaranteed for five years at a 6% yield and so a gross capital value of £16.6m. If the income was changed to turnover based you would need to apply a higher yield, at least to the top element of the income, which is now vulnerable to an immediate reduction if trade diminishes. We might therefore still apply 6% to a core slice of £600,000 of income but then apply a discounted 7% to the next £200,000 and a further discount to 8% for the top slice of £200,000. This gives a gross value £15.35m, a blended yield of 6.5%, i.e. a 7.5% reduction to reflect income risk.” Which is better? An involuntary CVA, or what might be called ad Business Voluntary Arrangement (BVA) based on turnover.
First published in Property Week on July 6th 2018