Retail: does one size fit all?

Distress in the retail sector has become a staple in business columns, with retailers and their landlords under intense pressure from the shift online and the persistently negative sentiment in equity markets.

The landlords bring to mind King Canute as they stand against the tide of Company Voluntary Arrangements (CVAs). Accepting reduced rent can make good business sense when weighed against the prospect of an empty unit upon a retailer’s insolvency. On average, UK shops take 340 days to re-let, more than three times longer than before the Brexit vote.

Not all shops are suffering: destination shopping centres and outlet villages are consistently reporting greater footfall. What’s more, the “clicks to bricks” movement is bringing online retailers into the physical universe in search of higher margins (absent costs of shipping and returns). Studies also indicate that a physical store drives the retailer’s online traffic in the local area and that 89% of all UK retail sales “touch” a store. Whatever the reason, Amazon is said to be in the market for 200 new UK stores for “Amazon Go”, a potential buy-out of a German hypermarket company (Metro AG) and is also looking to snap up any stores becoming available as a result of a Sainsbury/Asda merger (to expand Whole Foods).

The BBC recently reported that over 200 UK shopping centres are “in crisis”. It is generic, undifferentiated stores which are – rightly - suffering most. But sentiment in the equity markets is doing an equally poor job of differentiation; the quality portfolios of Unibail-Rodamco Westfield and Klepierre haven’t prevented the c.45% reduction in their market caps over the last 3-4 years. Negative sentiment seems even to trump net rental growth (for Klepierre, up 3.1% last quarter), and it is debt levels which are in sharpest focus.

Brookfield and the Peel consortium obviously feel it isn’t one size fits all, having tabled 210.4p per share to take Intu private. Intu have 10 of the UK’s top 25 shopping centres and previously accepted an (aborted) offer from Hammerson at c.253p per share only last December. US malls found a floor about a year ago; time will tell whether Peel have correctly called the bottom in the UK.

In the meantime, we are seeing opportunities for private capital to de-lever the listed sector (such as preferred equity JVs), and investors tell us that retail values are getting close to (but not quite at) an attractive entry point. They have a range of strategies in mind, including taking advantage of relaxed planning rules just announced in the UK Budget to re-position tired centres to vibrant mixed-use residential schemes. After falling off a cliff in 2017, global capital raised for specific retail real estate funds tripled in just the first half of 2018. They are ready to strike.

So, the retail sector is generating opportunities across restructuring, public and private investment, with more to come.

Nothing is truly one-size-fits-all, but our firm is covering most of the bases in this space. If you would like to find out more, please get in touch with us.