CRISIS IN THE RETAIL MARKET – FROM BOTH PERSPECTIVES
We are fast approaching a crisis situation in the Irish retail sector. Rather than lamenting the days of the Celtic Tiger, blaming the various stakeholders involved or setting up yet more working groups to debate the issue, the time has come for calling it straight and coming up with sensible solutions to ensure that more retail businesses do not go out of business.
- With the volume and value of retail sales down more than 17% year-on-year and consumer confidence extremely weak, retailers are under huge pressure and struggling to maintain margins and ensure the survival of their businesses.
- Many retailers signed leases over the last few years, agreeing to pay rents, which at the peak of the economic cycle were manageable but are now proving unsustainable considering the extent to which their business has declined.
- The ‘upwards only’ regime that has prevailed in Ireland and the UK since the 1960’s was originally put in place to ensure that rents kept in place with inflation. However, rental hikes over the last few years have been considerably higher than inflation.
- The new legislation banning upward only rent reviews which came into force on March 1st is welcome but does absolutely nothing for tenants who signed upward only leases under the old regime and are currently struggling to meet these rental payments. In fact, the legislation makes it even more difficult for some retailers to offload their existing leases, which contain upward only rent reviews clauses.
- The banks and Government are working on solutions to help householders who find themselves unable to meet mortgage repayments they agreed to in recent years when circumstances were very different. There doesn’t seem to be any sympathy for retailers who likewise signed contracts to pay agreed rental levels but now find themselves unable to meet these payments.
- There is a lot of talk in the property industry of the market ‘fixing itself’. Surely retailers having to close down retail units and threaten job losses before a landlord caves in and agrees to reduce the rent does not demonstrate the market regulating itself effectively?
- Many landlords are just simply refusing to listen to the plight of the retailers.
- Surely a tenant, paying a lesser rent, is better than no tenant?
- Some landlords could be accused of trying to maintain headline rental levels in order to maximise valuations on assets that will ultimately be transferring to the NAMA vehicle.
- Landlords are being approached by their retail tenants looking for rent reductions or temporary solutions to enable the retailers to remain in business. Most of these pleas are genuine but there are other retailers who are taking advantage of the market conditions to put pressure on their landlords, who themselves are under huge financial strain and in many cases cannot afford to reduce rents considering their own borrowing committments.
- High rents are only one of the costs putting pressure on retailers in the current environment. High labour costs, insurance costs, energy costs and rates are also playing a part.
- Many landlords are institutions and pension funds who have specific target returns to achieve and whose investment is severely compromised if a rent reduction is granted. This has implications for the entire pension industry.
- It could be argued that tenants signed these leases with their eyes wide open and should now have to fulfil the obligations of the leases they signed, including upward only rent reviews.
- Tenants are now firmly in the driving seat in terms of negotiations on new leases. Rents have fallen since the peak and most tenants are now insisting on turnover-related deals, short leases or rent reviews linked to CPI. This is what agents talk about when they refer to the market having corrected itself although this is of no benefit to the retailers who signed deals at the peak of the market.
- In many cases, where the tenant can genuinely demonstrate the extent to which their business has deteriorated and demonstrate what measures they have personally taken to cut costs in their business etc, landlords are making efforts to put arrangements in place to help these retailers. However, other landlords are not engaging and in many cases, even where the landlord genuinely wants to work with the tenant, the banks are not permitting the landlord to grant a rent reduction.
- The media focus on the exorbitant rental increases being forced on retailers since the last rent review but don’t mention that these retailers in many cases agreed low initial rents at below market rental levels at the outset of the lease to compensate for other concessions.
There are valid arguments on both sides. However, enough jobs have already been lost. Over 200 retailers went insolvent in 2009 and another 200 are fast heading in the same direction. This is a crisis. The time for action is now and the only way this issue will be solved is if all stakeholders including the landlords, tenants and the banks sit down and come up with sensible solutions. We have got to the point where doing nothing is not an option.
Marie Hunt, Executive Director, Head of Research
CB Richard Ellis