Posted: 08 Sep, 2020
On 2nd September, part 3 of our webinar series with Colliers International saw five retail, strategy and restructuring experts discuss the state of the UK retail sector and where it is headed. They debated the evolving nature of the high street and shopping centres, the role of Government in supporting the sector from a physical and digital perspective, and the scope for change in future leasing models.
We thank Nick Hammond, Head of Advisory & Restructuring at Colliers International, for moderating this webinar which was joined by over 100 listeners, many of whom participated by submitting questions. The full recording can be accessed here.
Damian Webb – Partner, RSM Restructuring Advisory
Peter Stevens – Chair of Credit Committee, SME Capital UK
Matthew Thompson – Head of Retail Strategy, Colliers International
David Fox – Co-Head of Retail Agency, Colliers International
Lloyd Entwistle – Director, Agency & Development, Colliers International
Nick opened the discussion with an overview of recent spending patterns saying that high street footfall has increased in recent weeks with online retail sales declining. But while this indicates that consumer confidence is rising, it remains low with many worried about their job security and personal finances.
While consumer confidence is expected to return in the coming months and years, Matthew thinks online shopping will continue to play a big role in spending and said that those shops without efficient online platforms will fall behind. As time rolls on, Matthew expects there to be fewer, better stores, and that the survivors will be those that excel in online order fulfilment.
Damian said that while many retailers will be looking to improve their online ordering system, the more immediate problem for fashion retailers is to get out of the discounting models that many have used to increase footfall and shift summer stock since the lock down eased. While discounting has been effective in getting people back in to shops, he thinks many retailers will struggle to maintain sales as they move back to profitable margins.
Lloyd joined the debate saying it’s important to remember that the move towards online spending was already happening pre-Covid but that the lockdown has forced its acceleration. He and Nick agreed that while some balance will return between online and in-store spending, the role of the physical store is going to change.
With the role of the physical store changing, Nick then asked the panellists where funders and property owners fit into the equation and if it is going to become more difficult to own retail property.
David responded by saying that some of the smaller market town shopping centres did surprisingly well during lockdown, largely because they tend to be less focussed on fashion and more on essential purchases such as drug stores, food and discounters. “The lockdown has shown that those centres still have value.”
The fashion sector, however, was hard hit and this has affected retail property values. Even before Covid-19, running a shopping centre as a business was becoming more and more of a challenge with vacancy rates increasing and landlords sitting on empty rate costs and service charge costs, both of which are incredibly high.
Damian said that this is a “major structural issue for the UK economy” because shopping centres are largely invested in by pension schemes. He thinks that shopping centres need to move onto turnover based leases.
David agreed and said there needs to be a market correction on two levels, a correction on the cost base for the retailers and a correction on and understanding of the true fall in values of shopping centre assets.
Until this happens and asset values stabilise, Peter said that lenders will find it tough to make lending decisions.
Discussing the evolution of leasing models, David thinks rents will move to more of a hybrid model where grocery stores may not want to share their profits with landlords whereas fashion retailers will benefit from turnover based leases as they rely on seasonal shopping.
Hammerson recently announced that it will trial a new flexible leasing structure in Scotland with an ‘omnichannel top-up element’ and Nick asked the panellists how this might work in practice. Lloyd thinks that flexible leasing models could be a good option for the different retailers who all want different models but in order for flexible leasing structures to work, he said there needs to be complete transparency between retailers and landlords which is difficult to achieve. Matthew agreed that transparency is key but also that there needs to be a significant improvement in data capture and sharing as many landlords have no idea what kind of footfall their tenants have.
Discussion then moved on to the role of government in getting the retail sector back on its feet with Peter saying that the furlough scheme, business rates relief and loans have undoubtedly been a lifesaver for many businesses. However, he is concerned about when the interest free period ends, and businesses have to find cash to service the loan. The UK Government has been clear that it won’t continue to provide support and so Peter said that it’s important for retailers to seek advice and to focus on their forecasts for the weeks, months and years ahead to ensure they won’t run out of cash.
Nick and David then discussed what they consider to be the biggest issue facing most retailers right now, that of business rates. Nick said that while business rates relief has been a welcome help to many businesses throughout lockdown, landlords have received no such relief and the delay of the business rate revaluation to 2023 means that when businesses do start to pay their business rates again they will be paying rates based on values assessed in 2015, which are already 5 years out of date and in many locations completely out of sync with actual market rental values.
He and David agreed that the business rates system needs a major overhaul where it is activity that is taxed, not just property which may or may not be empty.
Discussion then moved on to how retail spaces can be regenerated and repurposed. While, historically, councils have been reluctant to approve change of use applications for retail units, Lloyd said that the oversupply of retail property has become an increasing problem for councils with the collapse of retailers like BHS and Debenhams. Council and town planners have become much more open to repurposing but the issue now, is time and resources, with most councils struggling to deal with the number of applications for change of use.
Lloyd added that the changes to the Use Classes Order which came into effect on 01 September should help to enable properties to transition from one use to another more quickly and cost-effectively, but as ever the devil will be in the detail and the effectiveness of these changes has yet to be tested in the market.
Moving on to the Corporate Insolvency & Governance Act, Nick asked the panellists if they expect to see the new restructuring tools being used by retailers in the coming months.
Damian does expect to see them used but only by larger organisations who can afford to use the tools which are proving very expensive with advisory fees upwards of £250,000. In general, he thinks the existing tools, particularly CVAs, will remain popular with retailers.
Nick agreed that CVAs will remain the tool of choice and Damian said that the key to successful CVAs is to look at the overall capital structure and costs and not just focus on landlords. But while they shouldn’t focus on landlords, he did say that it is an inescapable fact that CVAs can achieve in 2 months what negotiations with landlords can achieve in 2 years.
Looking to the future, Nick asked the panellists how tech can be used by occupiers and owners to improve profitability. Matthew responded by saying that the need for better data is increasing across the sector and that now is the time to discuss a data driven approach to leasing which will benefit both occupiers and landlords. Lloyd agreed that footfall and turnover should be key considerations when structuring leasing deals and so efforts need to be made to improve data capture and transparency.
In their closing remarks, all the panellists agreed that they are optimistic about the future of the retail sector but that stakeholders need to fully engage with one another to ensure that as the market evolves, everyone benefits.
Thank you to all the speakers for their time and to everyone who joined the webinar. The next TMA event will be a webinar in partnership with Mourant to take place on 16th September. Register now.
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