U.K. Mall Landlords Owed $3.1 Billion Rent Expect the Worst

(Bloomberg) -- British shopkeepers slowly emerging from three months of forced closure have a new problem on their hands: the rent is due.

Third quarter rents for the country’s commercial properties are billed on Wednesday with about 2.5 billion pounds ($3.1 billion) owed by retailers alone, according to the British Property Federation. While mall landlords eventually got about half the rent owed for the second quarter, government curbs on their ability to force payments mean they may get even less this time around.

“This has never happened before and let’s hope to God it never happens again,” said David Fox, co-head of retail agency at broker Colliers International Group Inc. “The expectation is that this quarter’s rent collection is likely to be slightly worse.”

Britain’s mall and store owners were already grappling with falling rents and values even before the coronavirus hit, as retailers sought to cut costs in the face of rising wages, taxes and online competition. Now landlords face an existential threat as retailers collapse into bankruptcy with little sign of new operators looking to take their place.

Intu Properties Plc, which owns nine of the U.K.’s largest malls, has found itself in a precarious position. The landlord said Tuesday it’s in crunch talks with lenders as it tries to secure waivers on debt terms to avoid collapsing into administration. It collected about 40% of the rent it was owed for the second quarter.

British Land Co., which owns the Meadowhall shopping center in Sheffield, expects Wednesday’s collection to be at least as bad as the prior period, Chief Executive Officer Chris Grigg said in an interview. The company can withstand sharp writedowns in property values and a prolonged period of reduced rent collection in its stores, thanks to a large portfolio of offices that have been more resilient to the crisis, he said.

Under Pressure

Meanwhile, the government has put a temporary ban on evictions to protect retailers unable to make rent, as well as limiting landlords’ abilities to force non-paying tenants into bankruptcy. But it hasn’t extended the same emergency support measures to property owners to help them service interest payments due to lenders, meaning many now face mounting pressure.

“If landlords take a further huge hit this week then that will put much more pressure on them and their lenders,” Melanie Leech, chief executive officer of the British Property Federation said. While government has been focused on the short-term impact on retail jobs, it should also be mindful of “destabilizing the property funding ecosystem because that’s closely linked to the health of the economy overall,” Leech said.

Survival tactics are in full swing. Most retailers have been renegotiating rent and lease terms where they can during the lockdown, with many switching to paying monthly rather than quarterly. Many are pushing for turnover-based rents, where the amount they pay is linked to a store’s sales, or even, in some cases, rent deferrals and service charge reductions.

Most retailers have been renegotiating rent and lease terms where they can during the lockdown with many switching to paying monthly rather than quarterly. Many brands are pushing for turnover-based rents, where the amount they pay is linked to a store’s sales, or even, in some cases, rent deferrals and service charge reductions.

Pepco Group, owner of the Poundland value chain in the U.K., said Tuesday it had renegotiated its lease on 76 stores with rent reductions “ahead of our 25% expectation.” Fashion retailer New Look deferred its rent in March and has been negotiating with landlords since. Associated British Foods Plc, the owner of Primark Stores, in March withheld all of the second-quarter rent for the discount clothing chain’s U.K. stores.

“The reason we are so focused on rent collection is because it is currently the best indicator on which tenants are going to survive,” Rob Virdee, an analyst at real estate research firm Green Street Advisors said. “I think there are going to be a lot of tenant administrations, bankruptcies and a lot of pain.”

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