Property Investment- let's go shopping...or not?

Store Twenty One has written to its Landlords appealing for rent relief. The Landlords of the high street chain had already sent in Bailiffs fearing that its rent would go unpaid. Store Twenty One are appealing for half price rent or zero rent until the Lease expires. Troubles in the retail sector are not going to go away. More and more Tenants will appeal to their Landlords in similar fashion. I was very interested to read this article in Retail Week:

http://www.retail-week.com/property/retailers-and-landlords-lease-conflict-time-bomb/5036006.article

What does this mean for retail investment?

Well, the interesting point of the article is this- 50% of high street and shopping centre leases are set to expire by 2015. James Brown of property consultancy Jones Lang LaSalle states that 'in shopping centres and on the high street we are coming to the end of the 1980s-agreed 25-year leases, the 1990s 10-year leases and the sub-10 year leases of the last decade.' The article makes the point that vacancy rates will increase, once Leases expire, as international retailers focus on the top 30 locations.

The article also explains that many retailers looking to move into vacated properties are relatively young compared with those exiting the space. This will make for a dynamic mix of Tenants in a shopping centre. However, it will affect the value of Landlord's investments as new retailers are perceived to be 'weaker covenants' and therefore a higher risk. This could result in less rent. Indeed, many institutional Landlords (such as Hammerson- the Landlord of the Bullring shopping centre in Birmingham), when considering whether or not to invest in a shopping centre, are looking at covenant strength and the length of Leases and adjusting the value of the centre downwards to a level where it believes rental levels will move at renegotiation.

In conclusion, many Leases are due to expire by 2015. New retailers seeking to fill the void will face tough scrutiny from Landlords and investors. It's a grim story- rising rents and rates and falling footfall for Tenants. Leases coming to an end, vacant properties and the increased risk of new Tenants for the Landlord. Will this affect investment in shopping centres? It depends. Centres in big cities, with an attractive mix of strong and reputable Tenants will do well. British shopping centres are likely to remain a popular investment in contrast to their European neighbours. We shall have to wait until 2015, when most Leases come to an end, to see the effect on investment. Of one thing we can be certain- alternative assets, such as student accommodation, offer strong covenants and a stable income (see Legal & General's recent £91m investment in student accommodation). Alternative assets (as above) will continue to attract the interest of pension funds, sovereign wealth funds and International investors.

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