Just how far can the balance shift in favour of retailers against landlords?
We ask the question again this week after an investigation by our occupiers correspondent, Rachel Hunter, which, after being posted online last Friday, has generated a significant response (feedback, p44).
You can read her analysis in full again on p38. In it, CBRE estimates that more than £1bn has been lost in rent and rates since the start of the current slump.
The situation is compounded by what Liberal Democrat peer and Property Week columnist Lord Oakeshott calls a further, unfolding “major scandal”: that of company voluntary arrangements and prepack administrations. We highlighted their devastating potential on 20 April (analysis), but we make no apology for returning to them again, as their use becomes more widespread.
As Oakeshott warns: “This is now completely undermining how the property industry works, and is deeply damaging for landlords and pension funds.”
Investors are starting to ask: “What is a lease worth?” Because the financial agreement struck when a retailer signs seems breakable from one side.
This week, the Times reports, the ante was upped by international retailer H&M, which is importing its continental style of dictating lease terms to landlords when it signs for space. It can demand a rent reduction if 15% or more of a centre it occupies falls vacant or to terminate its lease when big names such as Topshop, Next and Debenhams quit.
Just where do retailers get off?
Don’t they understand that landlords simply provide the theatre from which they sell their products, and cannot be blamed if a retailer’s miserable stock, disinterested staff or lacklustre ideas fall from grace?
Yes, retailers go bust because of the internet, but they are far more likely to be unable to pay their bills because they are hopeless traders, rather than the entrepreneurial sales machines they aspire to be.
The concern now is that high-class British retailers such as Next and Arcadia take a leaf out of H&M’s book by also trying to dictate onerous terms. They might succeed in existing property, but don’t stand a chance in the new centres and units they need to bolster their year-on-year sales.
And while stronger retailers may be able to push landlords around, woe betide a New Look or other brand dogged by financial doubts that tries to push its luck.
Landlords still have the power to refuse outrageous requests from retailers they would be happy to see the back of, to allow fresh blood into their schemes.
In the longer term, with the security of the long lease eroding year by year, landlords need to think long and hard about where they buy and develop real estate. It all goes back to fundamentals now: the long, index-linked lease to a supposedly secure covenant is gone.
Now, landlords need to forensically examine demand and supply in any location, think about how a property could be reconfigured if all goes wrong and, of course, consider location, location, location at all times.
Because, as one retail sage told us this week: “It’s all too damned easy for someone to hand back the keys.”