Saturday, 3 March 2018

Maplin's landlords - cutting off their noses to spite their faces.

From The Evening Standard:

Landlords to collapsed retailers Toys R Us and Maplin could be left with empty stores totalling more than two Shard skyscrapers and lose tens of millions of pounds in rent, property experts predicted on Thursday.

Agent Colliers International has calculated that the failed chains use more than 4 million sq ft of space in the UK. That comprises around 300 shops... 
Industry sources estimate that collectively landlords were getting an income of around £73.8 million a year from the failed tenants...

If no rescue deals are agreed, a long list of landlords could be left with vacant space, including LandSec, British Land, Hammerson and Intu. 


Ho hum, let's take one of my favourite shops, Maplin.

Their 2017 accounts show a net loss of £3.9 million after paying £21.7 million in rent. Maplin also own some long leaseholds, but most of their shops were rented.

Sane landlords would just reduce the rent by a quarter, leaving Maplin at least marginally profitable. But instead of accepting £16 million a year easy money*, they decided to push Maplin into insolvency. As a result, they can whistle for the last quarters' rent and will be stuck with long void periods until they finally decide to accept lower rents.

* The average paid by both businesses was £18.45/square foot. The actual costs to the landlord is south of £10/square foot, so a one-quarter reduction would still have left them with some unearned location rents.

I hope that the landlords can't wangle themselves any Business Rates discounts beyond the normal three months for empty premises (which is three months too long, if you ask me). If local councils waive the rates, this just enables the landlords to hold all these units out of use for longer, with a corresponding depressing effect on other shops on the same High Street or in the same shopping centre or 'retail park'.

17 comments:

The Stigler said...

It's certainly odd because from what I can tell, there isn't anyone much coming into the bricks-and-mortar retailing space. The local retail park with our Maplins already has a couple of large empty spaces.

Bayard said...

The most striking example of this I can remember was Fribourg and Treyer, who traded out of No 34, Haymarket from 1852 to 1981, when new landlords tried to raise the rent. F&T then closed, not being able to afford the new rent and I was told that the landlords were unable to find a new tenant that would even pay what F&T had been paying.
I expect this is the same phenomenon as developers not reducing the price to shift empty flats or houses. They either are not prepared to or can't afford to admit that the properties are worth less than the price/rent they were originally valued at.

john b said...

There are two reasons for this:
1) the commercial property industry in the UK, unlike other countries (especially the US) has always sought to avoid the concept of rent reductions, even where this has meant short-term damage to utilisation. Maintaining the (implicit) cartel and ensuring that 'proper' shops continue to pay heavy rents is seen in the industry as more beneficial than maximising occupancy. Pop-ups, Christmas shops, etc, partially fill in the gaps.

2) partly because of 1, commercial property companies in the UK tend to be financially structured so that they are extremely debt-heavy, with debt at low interest rates because it's secured against the value of their property portfolio. A downgrade in the assessed value of their portfolio would trigger debt covenants, requiring them to refinance either by raising new equity or borrowing money at unsecured interest rates. And giving permanent rent cuts to long-term tenants is exactly the kind of event that would trigger a downgrade in the assessed value of their property portfolio.

Unsurprisingly, the people running the companies in question would rather run on empty and hope the market picks up before they go bust, than cut rents now and go bust immediately (even though the net loss to the economy as a whole might well be lesser with option B).

Rich Tee said...

I've always understood that commercial property is often owned by funds and individual buildings are often a small part of a much larger portfolio. This makes their ownership quite bureaucratic and inflexible.

I learned this from a TV programme about Cumbernauld Shopping Centre, when somebody was trying to explain why the owners don't just knock it down and rebuild it.

I suppose eventually the fund will start making a loss which will cause the fund manager to look more closely at what is losing money.

Mark Wadsworth said...

TS, exactly.

B, thanks, there are presumably endless examples down the ages.

JB, yes, that is how this apparently irrational behaviour is usually explained and it is probably how these people think.

RT, there's that as well.

Bayard said...

John b, thanks for backing up my hunch.

mombers said...

I've spoken to the property fund managers at my work (asset management) about the rates vs rents relationship and how about they target premises with imminent rates reductions so that they can jack up the rents. Amazingly, they wouldn't even countenance the HMRC, IFS, etc. studies showing great evidence of the incidence of business rates. It's a real cash cow, generates a disproportionate portion of our revenue. Like shooting fish in a barrel though, such a range of properties and such a strong balance sheet, they really can just sit on their hands if a place becomes vacant. Not that highly leveraged either - it is people putting their pensions in as equity.

Lola said...

I sublet an office of a company that had moved out to bigger premises. They had been £12 / foot (taken on in the 80's boom) but all it was worth now was £6 / ft, which is what I paid. The building was owned by the Co-Operative Pension Fund Property Unit Trust. They got really umpty about the sub-let as it clearly indicated the true worth of the premises. Then the building was sold to a disgustingly devious agent creating an 'opportunity' for a bunch of investors. he also tried everything to jack up the rent and failed and the single company 'opportunity' went bust and guess who bought it out of receivership. Yep, the same agent. and he's still trying to jack up the rents.
What's more the LA agreed with a developer to forgo business rates on another block he wanted to refurb so that the developer could charge higher rents!!!

Mark Wadsworth said...

M, that's the other likely explanation.

L, ta, that £6 figure is the base line I was looking for.

Lola said...

MW. That £6 / ft was in 1994.

I now pay £7 / ft including 6 car parking spaces in a town centre location in Ipswich. (In 1994 I had a similar town centre-ish location of 650 ft/sq but with 2/3 car parking spaces.) My total accommodation costs - rent, rates, service charges (including a lift), light and heat (inc. those 6 parking spaces) - is about £36,000 per annum for 2200 ft / sq.

Mark Wadsworth said...

L, ta. I need to know what minimum bricks and mortar return is, everything above that us location value. Shall we call it £10 bricks and mortar, rest location?

Anonymous said...

The 2017 accounts also mention a £9.6m dividend payment, which on a loss of 3.2m sounds incredibly suspicious.

Mark Wadsworth said...

F, well spotted.

But dividends are paid out of retained profits from earlier years less loss for the year of approx. £16 bn, so that is perfectly legal and above board. I don't think they shafted their pension fund and employees as it traditional with other businesses.

Graeme said...

Not sure about John B's explanation. I just checked accounts for: Land Securities, Great Portland, Derwent and Hammerson Their gearing ratios were: 25.6%, 20.9%, 18%,zero Not exactly highly geared and with rates so low, possibly under-geared and waiting for rate rises. Maybe house builders are more highly geared but that is a different market L

Lola said...

MW The building and carpark was sold for 450K about two years ago. It's about 6700 sq/ft. So that's about £67 sq/ft. Yield rent only would be £7 x 6700 ~ £47,000 per annum. Is a 10% return which is bloody good. You'd expect ~ 8% max.

Mark Wadsworth said...

G, thanks for researching and that is the other common explanation, which pretty much overlaps with John B's item 1. It's the 2 you disagree on.

L, thanks, supports my assumption that baseline return on bricks and mortar is less than £10 (possibly as low as £5) and everything over that is location rent.

Lola said...

MW. Yes. I think £5 in Ipswich is 'about' the B and M rent/return. The balance is location premium.
Office construction costs in South East say 1000 per metre square / £100 per ft sq. (Can someone verify?) my building would cost £670,000 to build, (plus land). At the rent of £7 / ft that gives a total yield of 7%, or 14 years purchase. In other words Ipswich location premiums are approaching zero at the present time. That is borne out by the 'need' to subsidise office construction by giving BR holidays.
This is confirms my opinion that CBD offices in Ipswich have low demand as it is impossible for many 'office type businesses' to make a profit due to other factors - in my case regulationism and corporate/income taxation. Mind you there are plenty of lawyers and accountants in these locations, both of whom have their own opportunities for rent seeking. (BTW I do make a profit :-))