Retailers misjudge landlords’ resolve

It says a lot about the state of the retail market that a company like William Hill, with a unique set of challenges resulting from the government’s crackdown on fixed-odds betting terminals, feels confident enough in its bargaining position to demand such large rent cuts.

Justifying its demands, William Hill was able to do more than simply plead for help to ensure its survival. What was at stake, the company said, was the future of the high street, not just William Hill. By accepting lower rents, landlords would “help maintain the viability of our high streets rather than become another closed unit with limited alternative uses”.

Next is another retailer that’s driving a hard bargain with landlords. In full-year results last Thursday, it said it had negotiated rent cuts on lease renewal of 29% and expected rents to carry on falling well into the future. “Our guess is that there will be shops in 15 years’ time, but they will be fewer in number, possibly smaller and MUCH less expensive,” it said.

The retailer also published results of a ‘stress test’ of its finances that assumed like-for-like bricks-and-mortar sales would continue to fall by 10% a year and came to the startling conclusion that by 2034 it could end up paying only £41 of rent for every £100 paid now.

Crucially, Next assumed that with the notable exception of central London, alternative uses wouldn’t provide much of a ‘rental floor’, beneath which retail rents could no longer fall. The retailer supported the argument by citing one store in a major UK city that would rent out for a mere £1.2m as an office, well below the current retail rent of £1.7m.

Next clearly has a vested interest in making this argument. It wants to prove to its shareholders that the business would still be viable if bricks-and-mortar sales were to continue falling. But the retailer’s maths look overoptimistic. Aside from the fact that Next’s bricks-and-mortar sales may well fall faster than those of other retailers, limiting its ability to negotiate big rent cuts, the retailer is underestimating the potential of alternative uses.

Landlords are already finding new uses for retail properties, and not just in London. As we revealed at the end of last year, L&G plans to turn a Homebase store in Bath into a later-living scheme and convert House of Fraser’s giant Birmingham store into offices and a hotel.

Another key example is the Nicholsons shopping centre in Maidenhead, which is set to be redeveloped into a mixed-use scheme. This week, Rob Tincknell gives a sneak preview of the plans for the property, bought out of receivership by his new company Areli earlier this year, with backing from Tikehau. Tincknell and Tikehau real estate head Frédéric Jariel also outline their vision for the future of town centres. They want to create “24/7 neighbourhoods” with a mix of retail, leisure and homes. As for the mix of shops, Tincknell wants to see “local retail, driven by locals”.

I bet the likes of William Hill and Next don’t figure highly in their plans.