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Introduction

This is the 43rd of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note focusses on two key themes: 

• End of the Moratorium: bloodbath or new beginning?
• BRC retail sales: consumer rebound continues apace

Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.

Key Messages

• End of business rate holiday and moratorium nigh
• Triple whammy of quarterly rent day in June
• Not all tenants are ready to resume full rent payment
• Rent arrears estimated to total £2.9bn (BRC)
• Ca. 50% of arrears have been paid (BPF)
• Ca. 27% if arrears have been renegotiated (BPF)
• Ca. 23% (£667m) still outstanding (BPF)
• 14% of retailers refusing to engage (BPF)
• 30% of retailers have already been threatened with CCJ (BRC)
• 80% of retailers given less than a year to pay arrears (BRC)
• Widespread evictions unlikely; few cases will come to the high court
• Further CVAs likely, but limited actual fall-out
• Consumer bounce-back continues
• Retail sales in May +10% vs May 2019
• Acceleration on April (+7.3%) and March (+8.3%)
• Online sales decline y-o-y by -8.1%

1.    End of the Moratorium: bloodbath or new beginning?

Bad things come in threes. In our ‘Retail Property Outlook 2021� report released at the end of last year, we warned of a potential meteorite crash in the retail property market at the end of June, if three key pinchpoints were not averted. None have been, so said meteorite crash is nigh.

The three key pinchpoints? The end of the business rate holiday, the lifting of the moratorium on forfeiture (both from 30 June) and quarterly rent day (24 June). In isolation, each one a major challenge for retail and leisure operators. Collectively, an infinitely tougher proposition altogether, with ramifications across retail property markets.

Business rates � what can be said that hasn’t been said many times before? That the current system is no longer fit-for-purpose is one of the few things that both retail landlords and tenants are united upon. Yet it is one factor of the market that both are powerless to do anything about.

When the business rate holiday was first introduced, it was widely hoped that it would prove a precursor to necessary reform. This has simply not come to pass � the original holiday period has simply been extended, but the old system will now simply kick back in from 30 June, albeit with very minor concessions.

From July, business rates relief will be reduced from 100% to 66% until March 2022. However, to be eligible for this relief, businesses must have been affected by the third national lockdown â€� meaning only those which were required to close on 5 Jan. But relief will be capped at £2m per business, a helping hand for smaller businesses, an insignificant drop in the ocean for most multiple retail and leisure operators.

But no reform to speak of. No making good on earlier murmurings on leveling the playing field between online and physical retailers, whether this is correct course of action or not. Addressing “tech tax� globally is reportedly high on the G7 agenda, but there is no indication that the UK government is putting business rates within this larger tax framework. With no substantial reform forthcoming, business rates remain an industry hot potato.

Even before the business rate holiday ends, another quarterly rent day looms large. Since March last year, rent collection rates from the retail sector have typically been well below 50%, even dipping below 20% in some cases. For leisure, the rates have been lower still, often 0%.

But both the retail and leisure sectors are in a tangibly better place now than they have been since the pandemic originally struck last year. Still trading under compromised conditions, they are at least rid of the shackles of lockdown and the bounce-back on the consumer side has been considerable. June should, in theory, see the highest rates of rent collection since Q4 2019.

But will all “non-essential� retailers and leisure operators resume 100% rent payments this quarter? Many probably will, but not all. Some may argue that it is still too soon and that whilst they are at least open again, trade has not yet stabilized to a level where they are in a position to meet their quarterly rent obligations. Beneath all the euphoria of re-opening and the veneer of a consumer bounce-back, the reality for most retail and leisure operators is that cash-flow remains exceptionally tight.

Which brings us to the thorniest issue of all: the end of the moratorium on forfeiture. And how rental arrears accumulated over the last year (estimated at £2.9bn) will be resolved. Are the battle lines between landlords and retailers really being drawn as aggressively as the media suggest?

There are, naturally, conflicting opinions from key industry bodies. The British Retail Consortium (BRC) has polled 24 key member retailers (accounting for more than £12bn in turnover and 5,000 stores) and found that 30% are already facing county court judgments from commercial landlords. Two-thirds have already been informed they will be subject to legal measures after the moratorium ends on 30 June. And 80% said some landlords have given them less than a year to pay back arrears accrued during the pandemic.

In making its case for the tenant, the BRC said: â€�The unpaid rents accrued during the pandemic, when most shops were shut, are a £2.9bn ball and chain that hold back growth and investment, and could result in a tsunami of closures. Government must ringfence the rent debts built up during the pandemic, giving retailers breathing space as they wait for footfall and cash flows to return. With this in place, all parties can work on a sustainable long-term solution, one that shares the pain wrought by the pandemic more equally between landlords and tenants.â€�

A slightly different take from the British Property Federation (BPF). Their latest figures suggest that 14% of tenants are refusing to engage with their landlords, despite proactive approaches from property owners on working collaboratively to achieve a solution. This cohort includes well-capitalised businesses that have traded throughout the pandemic. “The longer the moratoriums continue, the longer abuse will continue, which restricts support available to those businesses who truly need it,� said the BPF.

According to the BPF, half of the rent due to 36 landlords across 16,320 retail, leisure and hospitality leases since March 2020 has now been paid. Landlords and tenants have reached agreements on managing a further 27% through new payments plans, waivers, rent holidays and deferrals. This means that “justâ€� 23% of total rents owed since March last year remain unresolved. So, “justâ€� £667m then.

Melanie Leech, chief executive of the BPF, said: “The majority of commercial leases are now covered by agreements between property owners and tenants on how to manage rent arrears, with millions of pounds of support provided to vulnerable tenants and the retail property market resetting fast. Yet well-capitalised businesses continue to exploit the moratoriums and pay no rent, at the expense of the local authorities, pensions and savings funds that own the high street. Government must take action now, when most businesses are open and trading, to end this scandal.� Strong words.

In such an emotive, but ultimately imperfect, situation, it is difficult to not sympathise with both sides of the argument. No one is blind to the plight of retail and leisure occupiers over the last 18 months and the ongoing challenges that they face. But the fact remains that rents are a legal obligation and whatever the mitigating circumstances, the courts are more likely to rule in favour of the landlord (c.f. Westfield vs the Fragrance Shop, AEW vs Frasers et al).

But the media will inevitably side with the retailers, falling back on hackneyed clichés of “greedy landlordsâ€�. Many of whom are actually private individuals, wholly dependent on rental income as their only livelihood. And many more of whom are institutional funds â€� mere custodians of pensions and savings. So, ultimately the so-called “greedy landlordsâ€� are often the general public.

There is no “one-size-fits-all� solution to the issue of rent arrears, other than generics of landlord and tenant dialogue and necessary two-way compromise. Ring-fencing the arrears, as has been proposed, makes sense, but “ring-fencing� is not the same as “writing off�. And it would be helpful if a series of codes of practice could be drawn up as to the terms and periods of repayment. Again, individual cases will require different codes, but some sort of industry framework would at least provide a degree of guidance.

How will the end of the moratorium play out? A massive occupier bloodbath, as landlords finally have the power to evict non-rent paying tenants? Unlikely, as the retail sector is very much a tenants� market. If landlords had queues of other tenants lined up to replace them it may be different, but occupier demand is currently very thin, so this is unlikely to be the case. Most landlords will be intent on keeping most tenants in place, rather than forcibly evict them.

A slew of legal cases in the high court? Some, inevitably, but hopefully few disputes will actually get that far. The threat of legal action, coupled with the precedents we have already seen, is likely to be a key “negotiating tool� (or stick) on the part of more aggressive (or aggrieved) landlords. But hopefully most negotiations will continue out of court.

Further CVAs and administrations? Unfortunately, yes. Rightly or wrongly, this is the key “negotiating tool� occupiers have in their own armoury. And where legal precedents have tended to favour tenants over landlords (e.g. Regis, New Look). Massive fall out off the back of these inevitable CVAs? Some, but small in scale relative to what we’ve already seen during the pandemic (e.g. Debenhams, Arcadia).

For two industry bodies supposedly on opposite sides of the fence, there was actually considerable common ground between both the BRC’s and the BPF’s narrative. The BPF said that extending the moratorium past the end of June puts recovery in the UK and its town centres at risk, citing estimates that the sector provides £63.3bn in capital investment to the UK and £116.1bn to the wider economy. To quote the BRC: “Without action, it will be our city centres, our high streets and our shopping centres that suffer the consequences, holding back the wider economic recovery.â€�

Despite any impasse, a common goal of seeing our town centres flourish and the UK economy prosper. “We’re fighting a war, but we don’t know what for, ‘cos we want the same thing…we dream the same dream, we want the same thing, all that we need is to see it together�. The first (and probably only) time that the Rolling Stones and Belinda Carlisle have both been quoted in a single Retail Note�

2.    BRC retail sales: consumer rebound continues apace

On the consumer side, the narrative is unequivocally positive � increasingly so, in fact. Contrary to perceived economic wisdom, a substantial consumer bounce-back was always on the cards. But beware the media hyperbole and facile assumption that the retail sector has returned to normal. The time lag from consumer to occupier normality is considerable.

The BRC Retail Sales figure for May are a case in point. Retail spending last month grew at their strongest rate since the coronavirus pandemic hit the UK last March read the headlines. But what else should we honestly expect in the first full month post-lockdown? Cue the “vs 2019� comparisons�

According to the BRC, total sales increased +10.0% in May compared with the same month in 2019. That outstripped the +7.3% gains made in April on a two-year basis and the +8.3% growth recorded in March. Like-for-like sales soared even higher (+23.7% last month compared with May 2019). Wider consumer spending data from Barclaycard suggested similarly robust growth vs 2019 (+7.9%).

For the first time since the pandemic struck, the figures were not inflated by the grocery sector. There was still growth in food sales in May, but it was the slowest since the pandemic began. As outlined in last week’s note, this is an inevitable by-product of lockdown easing. And not one that the major grocery retailers weren’t expecting or prepared for.

What is implicit in these numbers is the complementary nature of retail and hospitality spending. Separate data from Mintel suggests that 42% of consumers said the closure of pubs/restaurants/cafes has discouraged them from visiting shopping locations in the same area. With lockdown easing on all sides, any barriers are dissipating generally. Consumers do not venture out exclusively to shop or eat out � they do both as part of a joined-up experience.

Quick to highlight “gains� made during the pandemic, the media seem very reticent to pick up on the reverse of online penetration rates as we return to something like normality. Online sales declined by -8.1% year-on-year in May, although they remain +39.1% higher than 2019 levels, as the BRC were at pains to point out.

The UK consumer is spending and will continue to do so � that is the least of the retail industry’s issues in the short- to –medium term. And the sector can only flourish to anything like its full potential when all its component parts are fully operational � physical, online and hospitality. Complementary collaborators in chief, not competitors�