New car list prices v headline rents

Good news is, Her Indoors went to look at the big new car the dealership offered her in place of the 'old' (i.e. new, she's only had it for two and a half years) one. It was more or less identical, except the front seats are a bit comfier so she's going to stick with what she's got.

Which brought us onto the topic of list prices. These are fantasy numbers. Most people either haggle a discount for cash; receive an overly generous trade-in for an old banger; a load of extras; and interest-free finance deal with 'deposit paid' or whatever. The ones the dealers really can't shift are sold to themselves for list, and then bought back second-hand and sold as ex-demonstrator models (or something, it's more complicated than that).

We have a client which arbitrages this. They buy such cars for their list price and (for example) also buy bulk advertising space in newspapers for a discount to the rate card. Instead of paying the dealers cash, they give the dealers a credit, which they can use to buy advertising space at below rate card (but above what the client paid).

It's all about keeping up appearances.

There was a fine article in the FT a week ago that says commercial landlords do exactly the same thing:

Something strange happened in UK retail property this spring. Stores fell like dominoes: Toys R Us UK and Maplin, the electronic outlet, entered insolvency; fashion retailer New Look closed dozens of shops in a company voluntary arrangement, followed by Poundworld and maternity and baby outlet Mothercare; retailer Marks and Spencer has announced store closures; and department store House of Fraser began preparing for retail closures. But despite the exodus of tenants, according to listed companies and published indices, rents on retail stores appeared to be rising.

When demand takes a plunge, intuitively one would expect the opposite. So how was that possible? MSCI, the index provider, reported retail property rental growth of 0.9 per cent for the three months to the end of March and 1 per cent for each of the two quarters before that. Intu, a shopping centre landlord, said in February that its estimated rental values were up by 1 per cent in 2017. The property agency CBRE said rents for shopping centres were up 1.4 per cent in 2017 and 0.1 per cent in the first quarter. There is value in these numbers, but they do not tell the full story.

The figures are based on what property people call “headline rents” — a figure that appears in contracts between landlords and their tenants. But headline rents do not take account of the various incentives from the landlord to the tenant. For example, it is standard to offer a rent-free period when a store (or office) opens, which generally lasts six months and can be as long as a year. At the same time, leases are getting shorter and lease breaks more common. If a landlord rents to a shop on a 10-year lease that can be broken after five years, with a one-year rent-free period, that incentive suddenly amounts to a fifth of the income a landlord can rely on receiving.

But there is more. Landlords also offer cash incentives to businesses, so a lease might actually begin with a transfer of money from landlord to tenant, not the other way round. This contribution, often used to fit out the store, can amount to another 10 per cent of the value of the lease — or sometimes even more, agents say. Like the rent-free period, it is not included in the headline rent, which may in turn be used to calculate the “estimated rental value” of properties, a figure representing the rent you could reasonably expect to receive on a new lease. 

Incentives tend to vary through the property cycle, increasing when conditions for landlords are tough. For obvious reasons, landlords can be reluctant to share what incentives they are offering. So the total cost of renting a store is likely to fall when chains are closing and landlords are struggling to fill space — without any effect on the headline numbers...

For more specifics in the UK, try the latest results from Next. The retailer has more than 500 shops in the UK and Ireland and is vocal about the rent drops it is securing from landlords. Among 19 stores where leases were renewed in 2017-18, Next said net rents, taking into account capital contributions, were down 28 per cent. During the same period, indices showed rents across the market rising about 1 per cent. In 2018-19 Next anticipates it will secure rent drops of 27 per cent, not including the 10 shops it will close altogether.