UK shopping centre landlords heavily exposed to CVAs, UBS warns
Bank finds large swath of floorspace let to retailers that are shrinking or in insolvency
Four of the UK’s largest real estate investment trusts are heavily exposed to struggling retailers and CVAs, the rising insolvency trend which has become synonymous with the decline of the high street, UBS has warned.
The analysis looked at the portfolios of four real estate investment trusts: British Land, Landsec, Hammerson, and Intu. Its findings hinge on using floorspace to weigh exposure to struggling retailers, rather than the more typical industry metric of rental income.
A fifth of the four Reits’ shopping centre floorspace is let to retailers that UBS classes as in insolvency or “shrinking”. This includes the increasing number of struggling retailers turning to company voluntary arrangements, an insolvency proceeding that allows financially challenged businesses to renegotiate debts with creditors.
UBS said the floorspace impact is “significantly higher than the companies’ reported rent impacted by CVAs, which ranges from 2.7 to 4 per cent of rental income.” It classified a “shrinking retailer” as one which reported a total sales decline in their last reported full-year.
In our view, this poses long-term risks to the retail Reits, including lower rental growth prospects and higher vacancy. Store closures in malls could lead to less pleasant shopping experience, reduced foot traffic and a vicious circle of that could lead to further store closures.
UBS
UBS said it analysed 1,477 retailers and 5,666 stores across 50 British shopping centres owned by the four Reits.
Measured by floorspace, the analysis found that 16 per cent of Hammerson’s tenants are companies that have been in administration or a CVA since 2012. The figure was 15 per cent for Intu, 12 per cent for British Land and 7 per cent for Landsec.
UBS did flag, however, that “some of the companies may have recovered and come out of administration, or have been bought by other businesses.” But the bank was happy to “take a prudent view” and said it considers “these business models to have an above-average level of risk.”
Still, the closure of poorly performing retailers can offer an opportunity for landlords.
A spokesperson for Hammerson said: “By replacing older and less engaging formats, we can target aspirational and consumer brands that use stores to gain direct physical exposure to their customer in high footfall locations.”
Hammerson said that in 2017 it took back an 11,000 square metre outlet at ailing retailer House of Fraser in its Highcross shopping centre in Leicester and turned it into a number of smaller shops, which have generated an additional £1.5m of income a year.
UBS also noted that some of the Reits have played down the impact of CVAs to investors:
British Land noted that almost half of its CVA stores are unaffected. Intu also commented in its recent results call that it is largely not affected by the CVAs and thinks ‘if anything, it is an opportunity’, possibly because department stores are space heavy but pay low rent.
UBS
Landsec and British Land declined to comment. Intu did not respond to a request for comment.