In October 2021, Ted Baker opened the doors to its newest store. Located on the top floor of Highcross Leicester shopping centre, the unit had previously been occupied by jewellery brand Thomas Sabo before remaining empty for five months. The new store is Ted Baker’s 97th in the UK, but only its third to open with shorter, more flexible lease terms, as part of a change in approach to its bricks-and-mortar business (the other two, in Bromley and Exeter, opened in August).
“Within our store portfolio there have been clear changes in footfall patterns, and there is uncertainty over the timing and degree of the return to previous patterns,” said Ted Baker chief executive Rachel Osborne, presenting its half-year results in November. “Our immediate response has been to focus on shifting to variable rent structure and to open short-term lease stores in new locations.”
Most retailers will now want a five-year lease with a tenant break at three. That works well for them
Neil Hockin, director and head of the shopping centre leasing team at Lunson Mitchenall
As highlighted by Drapers’ Reset Fashion Retail campaign retailers were seeking to occupy stores on less onerous and more flexible terms, even before the pandemic. Next chief executive Lord Wolfson said in 2018 that leases on 240 of the retailer’s then 528 UK stores would be due for renewal by 2021, presenting a “big opportunity” for rent reductions and shorter leases. In its 2020/21 financial year alone, the end of 80 leases led to renegotiations at 62 stores, at an average rent reduction of 58%.
In 2020, JD Sports Fashion executive chairman Peter Cowgill said that future investments in its 3,300 stores globally would depend on “rental realism and lease flexibility”.
Reducing terms
This shift in retail strategies marks a departure from the long and inflexible leases that had become the norm for UK fashion companies. In 2011, the average commercial lease length in the UK – including retail – was 10.2 years, property agency Briant Champion Long reports. Longer leases grant financial stability for landlords and provide an incentive to invest in the property.
In 2016, more than half (55%) of all new retail leases were six to 10 years, property agency Savills reports. It says lease lengths have since more than halved and are expected to reduce further in the next two years, when it predicts 90% of new leases will be shorter than five years.
Fashion retailers’ preference for shorter, more flexible leases “is very much a continuation of a trend that has been happening over the last 10 years-plus”, says Mark Burlton, managing director of retail real estate business Cross Border Retail. He adds that this change has been amplified “by a combination of the pandemic and a more general shift to online”.
Covid-19 has exacerbated the situation: lockdowns and store closures left retailers unable to meet rent payments. By February 2021, property management company Remit Consulting estimated that unpaid retail rent since March 2020 had reached £2.2bn in the UK, although commercial tenants are protected from eviction or other enforcement by chancellor Rishi Sunak’s moratorium (box, below), first introduced in March 2020, and since extended until March 2022.
Short selling
With more than 8,700 chain stores closed in the first half of 2021 alone (Local Data Company), the pandemic has also forced landlords to reconsider their commitment to long lease lengths, says Ross Bailey, founder of Appear Here, a platform that connects landlords with retailers looking for flexible premises and which has worked with fashion brands including Gucci and Net-a-Porter.
“The pandemic has forced landlords to adapt,” he says. “They have realised that they can earn up to 43% more from short-term leases [Appear Here data], compared with the old and outdated model. The landlord can generate a higher income from their properties and the retailer can remain agile and responsive to the market and their customers.”
“On renewals this year, we are definitely seeing a move toward more flexibility,” says Neil Hockin, director and head of the shopping centre leasing team at Lunson Mitchenall. “There is no ‘one size fits all’ solution, but most retailers will now want a five-year lease with a tenant break at three. That works well for them, because who knows what the world is going to look like in three or five years’ time?”
What is the role of the property moratorium in the retail rental market?
The UK government in June 2021 extended its moratorium on commercial leases again, until March 2022. The arrangement was first introduced in March 2020 in response to the closure of all “non-essential” retail during the pandemic and restricts the ability of commercial landlords to forfeit leases for non-payment of rent and to seize goods in payment of rent arrears, and was originally due to end on 30 June 2021.
The extension followed claims by trade bodies that hospitality and retail had collectively built debts of £5bn in rent arrears as a result of the pandemic. But the decision angered commercial landlords, who had recovered just 74% of rent owed in the UK within 60 days of its due date in the first quarter of 2021.
“The moratorium is effectively a cheap and effective way of the government protecting tenants,” says Mark Burlton, managing director of Cross Border Retail. “It means that more shops stay open but, clearly, if you are a landlord, it is the worst thing imaginable.” Should the scheme come to an end in March, he said a flurry of shorter-term leases is “inevitable”, as tenants and landlords are forced to renegotiate longer leases.
Smaller retailers are also seeking greater flexibility. “You look at huge high street retailers like Debenhams, which found themselves completely constrained by onerous lease terms, and unable to move and adapt quickly to changing markets,” says Anna Cargan, director of pre-loved children’s and maternity clothing retailer Buildabundle, which has one store in Cumbria. “Although we are tiny and nowhere near on that scale, we have definitely looked at that as a lesson learned, and would not want to get ourselves into that position.”
Cargan signed a rolling monthly lease when Buildabundle moved to a new store in 2020. It is now looking for a larger property on similar terms: “We may miss out on some units that have longer terms, but we think that it is worth it for the peace of mind and flexibility.”
Men’s formalwear brand Percival, meanwhile, this shift in the rental market has encouraged it to re-enter physical retail after a five-year hiatus. The brand opened a store in Berwick Street, in London’s Soho, in 2012 on a five-year lease, but switched to a pure ecommerce model after rents increased so significantly the site became untenable.
Landlords need to be more sympathetic to small businesses’ needs and risks
Dominic Boyce, head of operations, Percival
“Now we’ve reached a place where the ecommerce business is successful enough to actually support the concept of a bricks and mortar again,” says head of operations Dominic Boyce. “However, nobody has forgotten the previous experience, and so it was always a tentative investigation into finding a space again.” Percival worked with Appear Here to secure a nine-month lease on a property in Soho, where it opened in June 2021. It has been so successful Boyce is considering similar shorter-term leases in France, the US and other international markets.
“I think landlords need to be more willing to pivot more than they used to,” he comments. “They need to be more sympathetic to small businesses’ needs and risks.”
Landlords, meanwhile, are taking the opportunity to use short-term lets and pop-ups to fill vacant units. Direct Line Insurance Group estimates that institutional landlords are responsible for more than 40% of pop-up spaces booked in London. The owners of Lakeside Shopping Centre in Essex and Westfield London are among those to have played host to pop-ups, by retailers such as secondhand kids clothing brand KidEco and fashion rental app By Rotation.
Direct Line Insurance Group found that the average UK pop-up retail unit – on contracts from a single day to several months – is available to retailers for as little as £342 per day.
Dai had a pop-up in Marylebone in 2019
Athleisure-inspired workwear brand Dai has made use of pop-ups in London since its 2017 launch, including a month-long tenure at Marylebone in 2019 and a three-month stint at Spitalfields Market in 2020, just before the first UK lockdown.
“When we have looked at the data and average order value, it’s greater in store,” founder Joanna Dai says. “With our spaces, we love hosting events and fostering our community. So it is a great place to be doing all of that.” Pop-ups also have been valuable in understanding what locations work best and what types of customers drive footfall, she adds. The brand is now seeking a more permanent space with a lease of one to two years.
Benefits balanced
The retail property industry, predicated as it is on predictable and long-term income streams from occupiers, is being forced to adapt to the new shorter-term horizons.
However, Lunson Mitchenall’s Hockin believes longer leases help to provide landlords with the funds needed to keep properties attractive, and a lack of long-term commitment from retailers will offer little motivation for landlords to update physical stores. “If we want our institutional landlords to invest in these environments, there has to be return from them,” he says.
“If, as a landlord, you are not getting the returns, then putting more capital into upgrading the lighting or refurbishing shopping malls is very difficult,” says Hockin. “My concern is that if there is not significant capex [capital expenditure] into the sector, then, in 10 years’ time, we will look back at our stock of retail property in the UK and it will look really, really tired. The market needs to find more balance.”
Turnover rents, which are calculated as a proportion of a retailer’s revenues rather than a fixed sum, could be one route that proves more collaborative. A survey by asset manager Total Turnover Solutions in October 2021, found that 80% of brands, across all sectors, would support this more revenue-responsive approach. Next confirmed in August 2020 that 402 of its UK stores would switch to turnover-based rents.
New Look switched to turnover-based rents as part of its CVA, but faced resistance from some landlords
Some landlords are not keen, however. As part of its CVA, New Look sought to convert 402 units to turnover-based rent, and a further 68 to zero rent. The CVA gained 75% approval in September 2020, but four landlords, including British Land and Land Securities, fought the proposal and sought “bare minimum market rent”. The CVA was eventually pushed through by the High Court in May 2021.
For Appear Here’s Bailey, this shift is reinvigorating: “Flexible retail is enabling more independent retailers to launch on the high street than ever before. Demand on the Appear Here platform is above the level we were seeing pre-pandemic. Communities want authentic and unique high streets, which independent retailers are best placed to deliver and which the flexible retail model is facilitating.”
Shorter leases offer clear benefits for retailers: cost savings, lower risk and greater agility. They could also offer a short-term boost to UK high streets, but whether they are an antidote to lower footfall in the longer term is unclear.
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