Under the new lockdown restrictions, businesses retain the ability to offer takeaway and click and collect services. However, the ‘frozen’ footprint may still increase markedly with temporary closures across non-essential retail. This raises significant restructuring issues for businesses as to what remains open, which parts close and how much more of their estate remains in stasis longer-term once lockdown lifts.
Restructuring experts at PwC have analysed the liabilities businesses amassed across the collective 38.7 million square feet of their estate which were already temporarily closed – and the potential impact on approximately 30,000*** outlets which could come under the classification of non-essential retail.
Zelf Hussain, Retail Restructuring Partner at PwC, said “Arguably now, more than at any other time in decades, retailers are facing a battle to preserve the cash and liquidity needed to steer them through the next few months. Businesses, especially pubs, bars restaurants, gyms and cinemas for example, are now focused on surviving the short-term, stemming further permanent closures and being ready to take full advantage of the shortened Christmas trading period – if and when lockdown is lifted.”
“However they have the ultimate dilemma, given the pressure on businesses to batten down the hatches and drive down costs – all while trying to maximise revenues and stay solvent. Additionally, once they have stabilised their businesses they will pivot to dealing with the wall of liabilities – deferred payments to suppliers, landlords and HMRC that will have been built up through the crisis period.”
Businesses including pubs and bars, Italian restaurants, dentists, cinemas, social clubs and entertainment venues are particularly exposed to remaining mothballed, while hair and beauty, Asian restaurants, estate agents, mobile phone shops and off licences, DIY shops and vaping stores are among those businesses which bounced back quickest and reopened at a higher rate.
For many businesses in retail and other impacted industries there are a number of common challenges which are arising. As a result the key checklist for businesses includes:
- Dealing with unclear cash positions and cash forecasts, including currency effects
- Developing robust contingency plans and ‘what if’ scenarios to model impacts (e.g. cash needs, changes in customer demand, failure in the supply chain, withdrawal of credit insurance, restriction on cross border payments, changes in regulation or other business shocks
- Collaboratively addressing relationships with struggling customers who have liquidity issues/financial instability
Hussain, continued “Businesses, especially those in the retail, hospitality and leisure sectors have to balance a number of spinning plates. They are faced with a complex task of working out how national restrictions impact multiple outlets and venues in locations which may be operating under different rules as we come out of the latest lockdown and back into the Tier system.”
“Operationally – workforce redeployment, downsizing and potentially mothballing more operations will be at the top of firms’ agendas. Additionally, businesses including retailers securing finance against their stock and inventory also have the return of the Crown Preference to prepare for next month. Lenders can now be trumped by HMRC in the pecking order, which could lead to tougher or reduced lending terms, putting further pressure on the balance sheet.”
LDC data suggests that there has been a steady flow of new openings over the last few years. However, rather than being centred on high streets, activity is taking place in alternative sites including retail parks where footfall has held up in recent years, and recovered more quickly following the March lockdown.
In terms of repurposing of outlets, there have been relatively low levels of activity. Between 1 January 2018 and 31 August 2020, following 3,787 closures, 1592 units are now ‘live’ after being taken on by new tenants. 1796 remained vacant, while 399 underwent a structural change for different usage. Given the hibernation of the market this year most of this activity took place pre-2020. When the market reopens,the environment is set to accelerate repurposing trends as major retailers and landlords are now considering their options to overhaul retail space for commercial usage.
Compared to the casual dining sector, fashion sector and outlets located in big box retail parks, the analysis showed department stores had the largest percentage of vacant real estate – 67.5%, based on 175 vacants following 260 previous closures. Big box retailers had the highest proportion of outlets undergoing structural change following closures, with 88 outlets repurposed (17.4%).
Fashion and general clothing shouldered the bulk of previous closures (2690) across the sample, replacing 1185 outlets, leaving 1244 vacant and repurposing 261.
Mark Addley, Real Estate Restructuring Partner at PwC, said “The best performing stores with the highest footfall have traditionally been nestled in city centres – but they still have the millstone of the largest rents in many cases. Even with rent deferrals in place and turnover-based rents becoming increasingly popular, do they stay the course and retain their prime real estate? Or do they close some of them down where the revenues are not strong enough to help staunch cash burn across their business?”
“The effect on Britain’s retail businesses and real estate portfolios is set to be marked, especially around any space deemed to be surplus. The increasing use of turnover-based rent may offer a lifeline for both landlords and tenants in the short term. However, the consequence for landlords is significant – with the move away from fixed income and upward-only rent reviews – to now being dependent on the trading performance of the underlying tenant.”
Focusing on UK-wide reopening activity tracked between 1 August and 30 September, retail parks remained the most resilient on a proportional basis, followed by shopping centres and high streets. Secondary areas such as smaller high streets and parades were the most exposed. Despite managing to reopen 10,851 outlets, 3,231 outlets closed temporarily in this sector, which suggests these areas may also be impacted significantly during the second lockdown.
Addley continued “The shape of the high street has been changing, and the COVID-19 crisis is undoubtedly accelerating it. While we expect there to be more CVAs in the coming months that will enable some tenants to remain in their existing locations, we also expect to see the shift towards mixed-use locations continue. We have already seen traditional office occupiers take on suburban high street space that is more affordable and practical – and we are now seeing this move into prime locations also.”
“The prospect of leaving a flexible office and popping into a department store with a few floors devoted to a health centre, a cinema or a residential development is one that may have seemed completely alien previously. However retailers are actively working with landlords to consider their options. Nothing is off the table.”