In this week's update, in addition to the headline insights regarding footfall trends, retailer updates and administrations, we have also provided intel on retailer reopenings, insights from our rent review team and news of the delay in the Business Rate revaluation. We also examine the potential acceleration of the use of turnover linked terms and whether this represents a fundamental shift in the leasing model going forward.

We also include updated insights from our German and Asia Pacific retail agency teams in terms of how physical retail and leisure is recovering from lockdown.  With Germany now several weeks into their lockdown relaxation, retailer performance there is offering some interesting insights to the potential trajectory we could see in the UK.

HEADLINE UK RETAIL INSIGHTS

Footfall trends

• For the week ending 9th May, Springboard reported that the uplift in weekly footfall was the third increase in the last six weeks.  Total footfall was up 11.7% week on week (WoW) with high streets reporting the largest weekly uplift at 15.9% followed by retail parks at +10.0%.  Shopping centre footfall was up 4.5% WoW.  Springboard note that while footfall has been swinging from decline to increase over each two-week period, the magnitude of the increases have been outweighing the declines, with an average weekly change over the past six weeks of +5.5%.

Retailer, operator and landlord insights

• Debenhams announced that it will permanently close a further five of its branches in shopping centres owned by Hammerson, after it failed to secure new rent deals with the landlord. However, Next have since stepped in agreeing to take the Debenhams beauty hall space for their new beauty hall concept. The new beauty concepts will be located in the following Hammerson centres; Bullring & Grand Central, Birmingham; The Oracle, Reading; Highcross, Leicester; Silverburn, Glasgow, and Centrale in Croydon. Next’s new concept will complement its existing online beauty business.

• This move by Next highlights that there is still very much a role for physical retailing particularly for those parts of the retail market where online penetration remains limited as consumers still have a preference to try products before purchase. For example, only an estimated 10% of health & beauty sales are online, with the latest forecasts suggesting that this will only increase to 12% by 2023, albeit Covid may accelerate this trend over the short term.

• Hammerson have cited this as an example of repurposing retail space. To some extent this is true, but it is believed that Next has taken this space on flexible terms so there is a question mark over their longevity and the quantum of space that Next require. As a result, the real repurposing test is likely to come later as Hammerson may need to look to redevelop and reimagine the entire store space.

• Card Factory has reported a 267% increase in online sales while all of its stores have been closed during the lockdown. In response, the retailer set up a second warehouse in Wakefield in order to handle the rise in online orders and to comply with social distancing between staff members. Despite the surge in online sales, the retailer has still needed to pursue cost-saving measures including furloughing its store staff, negotiating rent reductions and reducing stock intake from suppliers.

• The Works released its year-end results to the end of 26th April 2020 last week. Total sales were up 3.5% with a more subdued like-for-like (LfL) growth of 0.7% (LfL sales have been calculated for the year to 22nd March 2020, the day before all stores closed due to lockdown). In the week to Sunday 22nd March 2020, overall LfL sales were up 81%, since then, online orders have tripled.  Some commentators suggest that annual LfL growth would have been weaker if not for the surge in demand in late March due to Covid-19. The Board issued a cautious outlook reflecting future uncertainty surrounding trading conditions with the focus currently on conversing cash flow, particularly in light of its debt levels pre-Covid. As a result, its new store rollout has been suspended with only a few select stores expected to open. 

The rise of turnover linked terms; is this the start of a more fundamental shift in the retail leasing model?

• Retailers, largely those outside of the ‘essential’ sectors, are increasingly pursuing turnover linked terms in relation to Covid-related renegotiations, regears and new lettings.  Some are even looking to link service charge payments to turnover performance.  Much of this is based on their projections that total store sales post-lockdown will be significantly down on pre-Covid levels in response to social distancing measures and a general decline in consumer spend. It also provides a certain degree of insurance if there was to be another lockdown.  However, the biggest driver is that retailers are in a much stronger negotiating position than they were pre-Covid providing a greater probability that turnover terms can be secured.

• Landlords are approaching these requests on a case-by-case basis, but it could reflect the start of a more fundamental and accelerated shift towards performance-related leasing terms.  However, for these to be more palatable to some landlords, there may be certain concessions that will be required from the retailer. For example, greater transparency in terms of existing store performance (before agreeing to terms), alongside how physical stores contribute to online sales within a catchment as well as including Click & Collect sales into total store turnovers. The flexibility turnover deals can offer retailers will also need to run both ways, with landlords able to terminate agreements due to poor performance.

• The outlet retail model can provide a good benchmark for how turnover structures could work. But, what is clear is that the most successful outlet schemes often involve more intensive asset management in terms of the shopping environment, infrastructure and marketing, meaning the landlord needs to take more control of the customer experience. As a result, the level of turnover agreed becomes all the more important in the success of a retail environment to both the occupier and landlord. It also means that the success of this model is probably better suited to retail destinations under single ownership rather than high streets where ownerships tend to be more disparate.

• However, the big question mark on the wider adoption of performance-related terms is around the valuation implications for landlords due to the move to variable income, which at this point remains little understood.

Reopenings and future strategies for coming out of lockdown

• The Government announced their initial strategy to ease lockdown on Sunday 10th March. This strategy could see the phased reopening of non-essential shops by the 1st June at the very earliest, dependent on infection rates.  At this point, we do not have detail on what parts of the retail market may be able to reopen first, although a detailed document setting out the strategy is expected to be released this week.

• The expectation of this announcement had already led many retailers and operators to look towards the end of lockdown and what that will mean for their businesses. There have been announcements from various retail and leisure tenants about their plans to reopen and their proposals to operate while observing social distancing rules, some of which we highlight below:

• B&Q have reopened all 288 stores following a successful implementation of new social distancing measures including reduced capacities in-store, two-metre distanced queuing system, one-way system and clear signage in-store, contactless-only payments and installation of Perspex screens at checkout.

• All Homebase stores reopened on Saturday 2nd May following successful trials, where they have also installed Perspex screens and are accepting card-only payments.

• Both Next and John Lewis have announced they are reviewing social distancing measures in the hopes of reopening.

• Ikea is planning to reopen its 22 branches before the end of the month with social distancing and other safety measures in place.

• As of Monday 4th May, KFC have reopened 100 restaurants for delivery with safety measures including offering a limited menu to support reduced kitchen teams and an opt-in policy for staff in order to ensure that all are comfortable to return. They have also introduced contactless handover of food and clear signage including stickers on the floor to help delivery drivers adhere to social distancing guidelines.

• Burger King have reopened four restaurants for home delivery and one drive-thru unit, with plans to open more locations throughout May.

• Costa have reopened 33 stores, with 19 branches open for delivery and 14 branches open for drive-thru only, with staff expected to wash their hands and wipe down surfaces every 30 minutes 

• McDonalds have announced they will reopen 15 branches for food delivery from 13th May and will offer a reduced menu through delivery-only services.

• Wagamama have launched a phased reopening for delivery, with four units (Hackney, Peckham, Bow and Leeds) now open.

• Pret have 30 branches open in London, following a trial in which 10 stores close to hospitals reopened. They are open until 2pm for takeaway and are also offering a delivery service.

• Nando’s are trialling delivery service from six reopened restaurants in London and Manchester.

• Five Guys initially kept restaurants open for delivery and Click and Collect orders, but plan to have 45 units open by the end of this week. 

• Greggs have postponed plans to reopen their units. They were originally planning to open 20 units in and around Newcastle as a trial, but have reversed this decision over concerns it could lead to large crowds.

Rent review insights

• There is a general sentiment among landlords to pause any current negotiations with retailers given the sensitive time, particularly for those not currently trading. This is, however, expected to change as the lockdown is eased.

• There are opportunities in regearing leases, with creative discussions to ensure sustainable occupation that is mutually beneficial for both landlord and tenant.

• There is an ongoing review of the appropriate valuation adjustment to make for rent review dates during the lockdown period. Open market letting negotiations are continuing to take place, however, the length of incentives agreed will become clearer in time as more leases complete.  It is important to highlight, however, that adjustments in discussion vary significantly, depending upon how prime the location is.

• While the full impact of lockdown upon rental valuations evolves, third-party determinations during this period have applied adjustments and this may increase. The effective dates of rent reviews will, therefore, be crucial for reviews in 2020.

• An increase in third-party dispute resolutions are forecast this year, as landlords move to protect their income in an uncertain market. This will particularly be the case in the absence of government support being provided to landlords, where retailers continue to push for rent holidays or defer of negotiations.

Business rates revaluation postponed 

• It has been confirmed that the business rates revaluation mooted for 2021 has been postponed. The proposed 2021 date would have meant revaluations based on April 2019 open market rents. Delaying the revaluation should mean rates will be based on reduced post-Covid rental levels, potentially reducing the cost of business rates to occupiers.

• However, considering existing rates are based on April 2015 values, and UK retail rents have declined 5.6% between Q115 and Q120 according to MSCI, there will continue to be an adverse burden placed on occupiers.

• A fundamental review of business rates is still required, particularly in light of the growth in online retailing, and the need to establish a more level playing field. Reports suggest that the Government are pursuing this.

• Retail and leisure occupiers are currently benefitting from a 12-month business rate holiday, off-setting some of the cash flow and profitability challenges that the Covid crisis has created. A future rebasing in rates, or a fundamental change in the system, will no doubt be welcomed by both occupiers and landlords.

Administrations & restructurings

• Unsurprisingly, Covid challenges are accelerating existing operational issues at a number of retailers. As a result, we are seeing more retailers pursue restructuring. Clarks is the newest addition to the list having instructed three of the big four accountancy firms to advise on a potential restructuring. It is expected this will lead to further store closures.

• J Crew become the first major US retailer to file for Chapter 11 bankruptcy protection as a result of Covid. As a result, the retailer’s main creditors will take control of the group in exchange for the cancellation of £1.3bn in debt. As a result, it is expected that a number of J Crew’s 500 stores will not reopen following the temporary lockdown closures. At this point, it is not known if, or how many, of its UK stores could be affected.

EUROPEAN & ASIA PACIFIC RETAIL INSIGHTS (FROM SAVILLS RETAIL AGENCY TEAM)

• Germany is starting to emerge from lockdown with footfall and sales performance providing some insight into what the initial UK retail recovery could look like once our restrictions are relaxed. In addition, we have detailed insights from our teams in Asia Pacific in terms of the recovery in their respective markets.

• We do not expect the UK will follow an identical trajectory, but it does suggest that initial footfall and in-store sales immediately after lockdown are likely to be sluggish with mass-market retailers, particularly fashion, more exposed. However, looking to Germany and China suggests that there are likely to be improvements WoW. Albeit this is likely to be dependent on social distancing measures instigated in the UK and the timing/phasing of the reopening of retail including future infection rates.

  Insights from Germany as they emerge from lockdown

• Stores of under 800 sq m have all reopened with some retailers temporarily reducing their tradeable floor area in order to meet this criterion. However, the relaxations have not been universal with some cities imposing stricter measures to the relaxation.

• Federal differences in the approach to relaxation are being reflected in footfall and turnover performance, with those states with stricter controls reporting lower store turnovers.  However, footfall levels have, in general, been improving WoW.

• The German Trade Association (HDE) reported that, based on their membership, store turnovers following the relaxation were approximately 40% of pre-Covid levels. However, anecdotally there are differences across different parts of the retail market. For example, mass-market retailers have been reporting a weaker recovery in footfall and sales while some luxury and premium brands have reported more marked improvement, with some individual luxury stores reporting daily sales in line with those seen prior to lockdown driven solely by domestic consumption. 

• In regards to Covid-related health considerations in terms of trying items on in-store, various fashion retailers have taken different approaches. Some brands are not allowing customers to try items on in-store, rather extending the returns period so they can try items at home. Others are allowing shoppers to try items, with those pieces that are not purchased set aside for three days based on the view that any potential Covid contamination will have been neutralised during this period.

INSIGHTS FROM ASIA PACIFIC

China

• Reports from our retail agency teams suggest that following the Chinese Public Holiday last weekend there was an improvement in footfall. Some shopping malls in Shanghai were nearly back at 100% capacity with queues for car parks and some of their more popular restaurants.

• Older shoppers were noticeably back having been extra cautious over the previous few months.

• Social distancing measures have reduced (albeit people are still wearing masks).

• Mass market fashion retailers are reporting a slower recovery, particularly domestic Chinese brands.

• Gyms are back at 70% capacity and are expected to reach 100% by the end of May. Nightclubs have reopened, but cinemas and theatres remain closed as do churches and temples.

• Luxury retail in China seems to be rebounding significantly, with the likes of LV, Hermes, Ferragamo and others all reporting strong sales boosted in part by the fact that travel is still restricted.

Hong Kong

• Hong Kong has not seen the same improvement, and reflects the fact that sales performance tends to be largely driven by mainland Chinese tourists, who remain absent.

• Vacancies are expected to increase with the expectation that some of the luxury brands will close one to two stores over the short term.

• Social distancing restrictions are easing with gyms and cinemas now back open. Gatherings of up to 50 people are now allowed and restaurants are up to a max capacity of eight people per table.

• Shopping centre footfall is improving, but the lack of tourists continues to exert a significant downward pressure.

• Starting to see occupational appetite from F&B operators return, albeit tentatively. Appetite from local retailers remains relatively weak.