Retail rents

There’s a retail-focussed, ‘prospects for the real estate market’, piece in the FT by Jonathan Ford.  He re-iterates some of the negative structural trends faced by the sector. The manager of the Oracle Centre in Reading told a group of our students how some retailers were tending to focus on fewer major centres.  I hadn’t really appreciated its macro effects.  This point is also made in the article.

Costs are rising with the increase in the minimum wage. Shopping habits have been changing vastly with the increasing penetration of online retailers, with spillover effects into property. Retailers used to need 200 stores to cover the UK. Now some analysts argue that just 80-100 stores may be enough.

There’s a striking statistic on the rental liabilities of Debenhams whose private equity owners raised lots of capital from sale and leaseback. Just look at Debenhams, a large department store group that sold and leased back a lot of its properties following a buyout a decade ago. In 2006, lease costs of £130m represented about 36 per cent of total pre-property profits of £354m. Last year, lease costs had risen to £214m on lower pre-property profits of £348m. Rents now devour more than 60 per cent of the group’s entire operating income. Debenhams may be an extreme case, but it is not alone.

It all fits with a narrative of flat rents in the retail sector.


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