RETAIL FORECASTS REPORT 2021 | BDO LLP
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RETAIL TRADING CONDITIONS
RENTS, LEASES AND BUSINESS RATES After years of steady transference of spend away from stores and towards e-commerce, the pandemic crisis has initiated a more dramatic shift. This has left many more shops with unprofitable setups, particularly where they are tied to quarterly rents with upward-only review arrangements that are fundamentally uneconomic in the face of crisis. The good news is that the pandemic also may finally be the catalyst for the issues of unsustainable rents and business rates, which have plagued retail for more than a decade, to be addressed. The Government is currently conducting a business rates review which is due to report back in Spring 2021 and there is now an opportunity for the government to replace the current rates holiday, possibly after an extension, with a new system more suited to a reality where businesses with large revenues generated online can shoulder more of the tax burden. However, this will be a complex process, especially as the government will need to weigh up how to increase taxes on Amazon and other multinational companies at a time when it is trying to negotiate trade deals with the US and others. Leases and rental agreements could also look dramatically different going forward, as 2020 gives a hint of how new relationships between retailers and landlords might help them adapt to a multichannel future that requires fewer physical stores. Recent months have seen an increase in consensual renegotiation
Nevertheless, there is a growing sense that turnover based agreements present the most viable and equitable blueprint for retailers continuing to operate stores in a context where even more spend has now migrated online. This may lead to a redistribution of equity in retail restructuring that brings landlords closer to the owners of businesses. The BPF insists that landlords are “increasingly supporting turnover-based rent models underpinned by collaboration and transparency”, with The Crown Estate, which includes London’s Regent Street in its portfolio, reportedly among those to pro- actively offer some of its tenants the choice of turnover based rents. If, between Government action and a renewed spirit of co-operation between retailers and landlords, the cost burden of stores could be reduced. We may then see the pandemic as the beginning of a new era for shops, with retailers able to increase investment in physical outlets, introducing more technology and other improvements, and creating truly compelling environments that can truly complement, and compete with, online. The good news is that the pandemic also may finally be the catalyst for the issues of unsustainable rents and business rates, which have plagued retail for more than a decade, to be addressed.
CVAs and pre-pack administrations, as retailers attempt to offload unviable stores and reduce rents, with examples including Hotter shoes, which shut down 46 stores and kept 15, Pizza Hut, which closed 29 of its 244 stores, and Poundstretcher, which secured rent cuts of between 30% and 40% for 84 of its 450 stores, with another 253 placed under review. Perhaps more significantly, though, the pandemic has led to numerous calls for more rent agreements to become more equitable and therefore ‘turnover’ based, a setup found more commonly in leisure and hospitality businesses, as well as in retailer stores in continental Europe and in outlet centres across the UK. In September New Look secured a CVA to switch to turnover-based rents at 402 of its UK stores, and no rent at all at the remaining 68, along with a concession that its landlords will be able to exit leases more easily if they can secure better terms elsewhere. This followed AllSaints, where in June it secured a CVA which saw its 41 stores across the UK and 42 in the US moving to turnover-based rent. Obviously these agreements require landlords to take ‘a hit’, with British Land, NewRiver and Landsec among those to vote against New Look’s CVA, and BPF chief executive Melanie Leech insisting CVAs should not be “used as a weapon by businesses to rip up leases permanently”. Shopping centre Intu itself fell into administration in June, after a plunge in rental income from its retail tenants.
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