The Uncertain Future of Local Authority Retail Portfolios

4th October 2021 by Mark Aldis

The considerable investment into logistics as a result of consumer spending has changed the way in which people purchase their goods.  According to Statista.com, in 2020 as high as 87 percent of UK households made online purchases within the preceding 12 months, making this the highest online purchase penetration rate in the country in the past 11 years.

It was evident prior to the pandemic that the UK retail market was suffering due to the change in consumer behaviour and spending.  Lockdown has brought about many more concerns to landlords and tenants within the retail market.

So, what does all this mean for retailers?

Whilst many were protected by rent abatements during lockdown, this has resulted in considerable arrears that are due to landlords.  Will tenants be able to pay off the arrears and continue to be able to make profit in order to carry on trading.

The government’s response to the COVID-19 outbreak has significantly shifted the balance of bargaining power to tenants: the Coronavirus Act 2020 limits a landlord’s ability to forfeit a lease, whilst the Corporate Insolvency and Governance Act 2020 provides additional hurdles for landlords serving statutory demands and presenting winding up petitions against their tenants.

The expectation is that landlords are inevitably going to lose out to tenants, where any tenant is better than none, especially in the private sector.  However, does this directly correlate to Local Authority portfolios?

Local Authorities retail portfolios can consist of main high street shops and retail outlets, both prime and secondary but then there are the secondary/tertiary retail parades serving local areas.  The pandemic brought about a dependence on local amenities with people restricting their own travel, reports suggest that these retail parades have not suffered to the degree of shopping centres and main high streets but until the fallout occurs over the latter part of 2021 and into 2020 it remains unclear.  The user clause will have a considerable impact but its an area that must be taken into consideration when reviewing Local Authority retail portfolios.

For those properties which are affected, it is becoming clear drastic measures are required to keep sustainability within the market.  It is publicly known that in the UK, several well-known retailers, New Look, AllSaints and Clarkes have already begun moving to a more flexible rental arrangement with landlords based on turnover rental provisions.  Recently, The Crown Estate, which owns the whole of London’s Regent Street and around half of St James’s, offered some of its tenants the choice to switch to turnover based rents.

With several experts recommending turnover-rents as the future for retail would this be suitable for non-prime Local Authority retail.  Whilst its clear that this gives comfort to a tenant, there are three important considerations a Local Authority would have to make.

• Increase in administration would result in growing pressures on the internal departments, or even the cost of outsourcing.
• Carefully considering the identify, nature and reputation of the Tenant and their business.
• Calculation and type of turnover rent; ‘Base Rent’ plus Turnover, Open Market Rent plus Turnover, or ‘Pure’ Turnover rent.

Our understanding from working closely with Authorities, the considerations above may all prove problematic when dealing with local and independent retailers who do not always seek professional advice to act on their behalf.

Mark Aldis – Author 
Partner
BSc (Hons) MRICS Registered Valuer

maldis@wilks-head.co.uk