Via Wolf Street

Land Securities, a Giant UK REIT, announced that it would try to sell a large portion of its properties. No buyers identified yet.

By Nick Corbishley, for WOLF STREET:

Land Securities (Landsec), one of the UK’s largest REITs, has unveiled plans to sell of up to a third of its £12.8 billion portfolio in a huge shift away from the retail market. It has not yet identified buyers. Besides its retail properties, LandSec owns a vast portfolio of London offices and specialist assets consisting of hotel, leisure and other properties. Those specialist assets, together with its retail properties, represent around half of the portfolio’s total valuation. But some of them are now on the chopping block.

Landsec says it will sell some properties to “crystallise significant value already created” and invest in new projects in London, including offices, whose occupancy levels have also been hit hard by the virus crisis. London, it says, remains “one of the world’s gateway cities” and central London assets, which already represent 64% of its portfolio, are “a good source of liquidity over time, with clear potential to recycle capital out of some assets and reinvest into new growth opportunities.”

At the end of September, when rents for the final quarter of 2020 came due, retail tenants paid only 13% of rent due for the fourth quarter, worse than at the shortfall on rent-due date at the end of June, according to the UK’s National Law Review. This added £2 billion to the pile of unpaid rents.

Foot traffic remains down almost a third compared to a year ago, with large cities hit hardiest. And it keeps on falling, as the government’s hospitality curfew, work-from-home policies and online shopping batter the high street. Many shops have already hit the wall. In the first nine months of this year, 13,900 high street stores were forced to shutter indefinitely, up one quarter from the same period in 2019, which itself was a record year, reports the Centre For Retail Research.

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In the hospitality sector, 82% of businesses say they need a reduction in rent to survive the winter months, particularly after the UK Government imposed its 10 p.m. curfew for bars and restaurants.

Many tenants aren’t paying their rents, either because they can’t or are choosing not to. At the end of September, the government, much to the dismay of commercial property owners, extended its ban on evictions of commercial property tenants to December 31. The moratorium is not a rent holiday and tenants remain liable for unpaid rent. But many retailers have used the hiatus to preserve cash and/or try to renegotiate the terms of their rental lease.

Landlords argue that without the threat of eviction, tenants have a free pass to not pay up, even when they can. Even big chains that did not have to close during the lockdown are refusing to pay their rents, in the hope of securing a better deal from their landlords. Walgreens Boots Alliance, which was classified as an essential retailer during the lockdown, argues that reduced footfall and a 50% collapse in sales during the lockdown mean it should be treated similarly to retailers who were forced to close.

But the balance of power in the market has shifted in the favor of tenants — at least those that still have a viable business model. Even if evictions were allowed, landlords know that in the current context, they would have difficulty replacing an evicted tenant — and the fact there there isn’t a good alternative after eviction makes landlords more flexible in dealing with their tenants.

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But there is a line they refuse to cross. For many, that line is a lease based only on store revenues. Three weeks ago, the struggling fashion retailer New Look was able to secure a revenue-linked model for 402 of its 470 stores, whereby rent will be charged at between 2% and 12% of revenues. Other large stores will no doubt ask for similar treatment. But some landlords, particularly listed ones, are refusing to budge.

“Some tenants are very vocal about what they would like us to do,” said Jean-Marc Jestin, chairman of Klepierre, Europe’s second-biggest publicly traded mall operator whose shares have slumped 65% this year. “But we can say what we are not going to do. We are not going to switch from the current lease structure with [minimum guaranteed rents] plus sales to only sales-based rent.”

Klepier is not alone in its rejection of turnover or sales-based rent. Unibail-Rodamco-Westfield, another mall giant, has also roundly dismissed the idea.

Widespread adoption of turnover rents would not only mean that retail landlords would have to provide much more detailed financial data to their investors; it would also impact the value of listed landlords themselves, says real estate equity analyst at Goodbody, who has been advising a number of U.K. REITs on turnover-lease structuring in the last two years.

“The valuers’ interpretation is that if there is a wholesale move or a switch to turnover leases there would be very severe markdowns in value because of the lack of definition on the income stream… If you are servicing debt, you need a clear income profile. If your retail income has a much smaller fixed component [and a] far more significant variably component, naturally your debt will be more expensive, more complex or not available at all.”

“The short-term effects of the coronavirus pandemic have only just become visible, but the long-term effects will impact lending and banking into next year and beyond,” said Nicole Lux, senior research fellow at The Business School in the City of London and author of a report on bank lending that found that banks, who are now fretting about the value of their collateral, have already cut back on making new loans, which is tightening further the wiggle room for retail property landlords and tenants alike. By Nick Corbishley, for WOLF STREET.

Local authorities gamble in commercial real estate, with impeccable timing. Read… Highly Leveraged Commercial Real Estate Bets that UK Local Authorities Took to Meet Budget Shortfalls Begin to Unravel

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