James Watson, head of retail capital markets, Colliers International
January is a time for lifestyle resolutions, which often means getting fit. Our office is filled with the aroma of herbal tea and the clutter of gym kits after a December spent building up a ‘winter coat’. Sadly, in the retail sector, it is also traditionally the month when weaker tenants run up the white flag.
Many operators take around 50% of their annual turnover in December, but after the feast of Christmas it is time for belt-tightening or even more drastic measures. House of Fraser will not be the first to come cap in hand to its landlords.
It is an accepted fact that shopping patterns have changed in the post-digital era, causing an increase in the frequency of defaults. While physical retail is still the most important piece in the jigsaw, the shift online has accelerated the process of natural selection and the demise of those too slow to adapt. Debt has also played a major part.
Although the endgame for these retailers has been slow to materialise, the process has recently accelerated. In the US, at least 50 retailers including Toys R Us, Gymboree and Payless filed for bankruptcy in 2017, contributing to the highest level of retail failures for six years.
Stalling the inevitable
In the UK, 118 retailers became insolvent last year, according to Deloitte (a 28% increase on 2016 when 92 filed for administration). Analysts have described this phenomenon as a day of reckoning for companies that have refused to accept losses, rolling over their debt refinancing for years.
The parallels with the UK retail property investment market are clear. Transactional volumes for in-town retail investment were significantly down in 2017, with a number of weaker assets failing to sell. It was surprising to us to see how readily these assets were then refinanced, often at comparable levels at which they had failed to sell. The owners of these assets and their lenders either believe things will improve or they also don’t want to crystallise their losses.
While money remains relatively cheap and there are investors looking to place debt, the ability to refinance property assets will continue to be straightforward.
However, in the same way as simply letting your belt out a notch or two after festive feasting is fooling no one, the complicity of investors and lenders in refinancing assets at unrealistic values is merely stalling the inevitable and delaying the return of a normalised market.