Thursday 26 January 2012

High Street survival and leases

For many years, UK and Irish retail property markets have been compromised by the existence of 25 year upward-only leases with no break clauses. This has ensured that institutional landlords like banks have been able to put the leases on their balance sheets as assets with a guaranteed income stream. In fact commercial property is valued not on its sale price, but rather as a multiple of annual rental*.
This explains why bank-landlords cannot renegotiate rentals, in that to acknowledge a lower yield means lowering the value of the asset in the balance sheet, leading to a need for re-capitalisation…God forbid,,,
Because of the global financial crisis, a two-tiermarket has emerged for high street leases depending on whether they have an upwards-only reviews or not.
For retailers the new leases mean there is a stronger focus on the unit, the pitch, the covenant and the lease terms. In other words, a more realistic, commercial approach to risk-sharing by the landlord.
There is a commercial logic to aligning the interests of the landlord and the tenant to ensure both maximise the performance of their capital. But it requires a more forensic approach to retail development in the future, with developers/investors, governments and banks taking a greater, long-term interest in how a retailer will trade.
Until then high street retail will continue on a downward spiral, as most of the action moves to the suburbs and retail parks…

* Deep down the same logic applies to domestic housing. In most countries outside the UK & Ireland, houses are regarded as places where people live, and are not seen as investments. In other words a house is valued at approximately 20 times its annual rental…a yield of 5%. This may explain the periodic housing bubbles that occur when consumers lose track of what their houses are really worth...
Incidentally, why not sit down with a strong coffee and try the 20x multiple on your home…?

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