Giving UK retail a new, flexible lease of life

The UK’s retail sector is going through a tough patch but rethinking traditional lease structures could prove beneficial to landlords and retailers.

July 10, 2018

Retail leases in the UK could become increasingly flexible as changing shopping patterns and ongoing retail woes accelerate a shift in longstanding norms within the sector.

The past six months has seen several UK retailers and department stores apply for a Company Voluntary Arrangement (CVA), allowing them to close loss-making stores, in response to a testing combination of weaker consumer spending, higher labor costs and business rates and the long running impact of a weaker pound. After issuing a profit warning in June, department store chain Debenhams said UK retail is experiencing “exceptionally difficult times”.

Another UK department store, House of Fraser, recently-announced a CVA which will involve the closure of 31 stores. Major chains, including Carpetright, children’s clothing specialist Mothercare, fashion chain New Look, have also launched CVAs this year. Clothing retail chain, Next, has asked for a CVA clause, which would give the chain a discount rent if nearby rival stores are under CVA terms.

“We are certainly seeing a general shortening of leases in the UK retail sector, and a rise in flexible leases,” says Colin Burnet, Director, EMEA Retail Research. “CVAs have shone a spotlight on lease structures but the changes we’re seeing reflect more of a fundamental shift in the market that’s moving the balance of power in favour of retailers.”

Less commitment

UK retail leases currently average around 10 years, according to research by JLL. At face value, there is little to differentiate UK leases from those in France, Germany and Spain, where they also span a decade on average.

In Italy, a minimum of six years is common. In France, retail tenants typically sign leases for at least nine years. However, an option to break a lease comes after three and six years.

In both Germany and Spain, there is no fixed term for tenants, with leases running to lengths agreed by both parties.

Retailers with UK operations are not alone in rethinking their lease terms. German retail tenants, says JLL Head of Retail Leasing, Dirk Wichner, are looking for more flexibility when signing leases, with more break clauses and less commitment to the future.

“At present, it is far from easy for a German retail tenant to break their lease,” he says. “As many properties are rented at above average levels, it becomes more and more difficult to sub-let or hand over to a new tenant who is willing to pay more to the landlord.”

Sweeping changes could bring many positive benefits for the wider retail scene, Burnet believes. For the UK, more flexible leases would encourage “more independent, experimental retailers onto the high street, bringing the freshness it now requires,” he says.

“There´s certainly appetite from retailers for more flexibility. The role of the store has transformed and retailers now go through very uneven sales periods. The ability to change use throughout year and alter formats depending on different locations could help.”

What’s good for retailers isn’t necessarily bad for landlords. “Enlightened” landlords, says Burnet, are also embracing flexible leases, something they are having to do to attract the right tenant mix of smaller independent operators, larger retailers, as well as leisure and food and beverage outlets.

“But some landlords are still wedded to longer-term income and the certainty of longer leases,” he says. “Landlords need stability at a time when online retail is creating challenging investment markets. Customer expectations are heightened and retailers’ rental affordability is declining.”

Turnover leases

The UK could, says Burnet, learn from the continental European partnership approach between landlords and retailers.

“One of the best ways to develop resilient retail places is through good relations,” he says. “Landlords and retailers need to innovate with new rental models – and crucially to work together.”

Continental Europe´s approach to data, says Burnet, would also be a welcome addition to the UK retail sector. “There´s more collaboration in Europe, with turnover leases more prevalent.” Turnover leases, where all or some of the rent is, rather than being fixed, determined by a retail tenant´s turnover, means data is more shared.

Germany, where tenants have break options and a maximum of five years as a fixed term, uses turnover to determine rent, explains Wichner.

For an international retailer such as H&M or Zara, the current diverse nature of Europe´s lease structures may appear cumbersome. However, their sheer size is sufficient influence when entering rental negotiations. “The bigger the retail chain, the more flexibility they are asking for,” says Wichner.

It’s all food for thought for the UK market, with landlords and brands keen to stem to number of familiar retailers falling prey to current woes. As retailers of all sizes adapt to an uncertain future, a more flexible approach to leases could better keep the accounts ticking over for all parties.

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