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June 20, 2018

The short-term impact of department stores closures may have piled pressure on the UK’s retail scene, but the longer-term picture still holds opportunities for investors.

The disappearance of department stores will lead investors to rethink their leasing strategies and consider alternative uses for retail space, but it may also encourage the brands that have previously relied on department stores to reach consumers to acquire their own stores on the high street.

Several UK retail giants have launched a Company Voluntary Arrangement (CVA), allowing them to close loss-making stores as a way to stay in business and avoid going into administration. Since the start of 2018, 10 retailers or restaurant groups have launched a CVA or entered administration. A decade ago in 2008 – ¬one of the worst years in retail in recent history ¬- 12 collapsed.

“In recent months, CVAs have been used to help struggling retailers survive,” explains Tim Vallance, Director, Head of UK Retail & Leisure at JLL. “For retailers, it’s a convenient but blunt instrument to either re-structure their rental contracts or walk away.”

UK department store House of Fraser’s recently-announced CVA, which will involve the closure of 31 stores, comes almost two years after another UK high street chain, BHS, ceased to trade. Children’s clothing specialist Mothercare, fashion chain New Look, and Carpetright are among other big brands to launch CVAs this year, citing competition from online shopping and rising business and wage costs.

Departures from the high street have raised serious concerns around retail rental income for UK investors. Retailers are taking shorter leases, resulting in rental income for investors becoming less guaranteed. A change in the way retail real estate is managed and leased goes against the traditional, long term investment models favoured by funds and institutions, which accounted for over 48 percent of all UK property deals in the first quarter of this year, according to capital markets research by JLL,

An opportunity for landlords

Many department store operators are turning to alternative uses for vacant space, with more food and recreational offerings to entice shoppers. Few investors would bet against the safety and security of grocery stores as anchor tenants in high street or shopping center locations.

Equally, the conversion of retail space into coworking centers is being pursued by retailers for extra revenue. In March this year, it was reported that WeWork, the biggest co-working brand in the world, was in talks with UK department store Debenhams over opening a co-working centre in the retailer’s flagship store in London’s Oxford Street.

“With retail tenants unlikely to commit to long-term leases, the door is open to alternative uses,” says Vallance. “Conversion of retail properties into other uses is already happening, with residential space, leisure, education and data centres created in former department stores over the last 15 years – this trend is simply continuing.”

“While retail landlords rethink their strategies, the high street may also benefit longer-term. Without the vessel of a department store, more brands will be looking for space on the high street”, says Vallance.

“Take a House of Fraser store for example, with as many as 100 concessions; it would be foolish to think that all those brands will relocate onto the high street,” he says. “But as part of that shake-out, even five to 10 percent would be a significant uptick for a UK regional shopping location.

“So this current pattern of CVA applications could have positive effects for the UK high street.”

With landlords now considering legal action in the case of House of Fraser’s CVA, the degree to which the arrangement is used over the coming months is hard to predict and Vallance believes the department store concept is still viable.

“With the ability to trade from multiple floors at discount rents and curate the best brands on flexible lease terms, whilst controlling the environment and general ambiance, department stores should still be a vital, viable and sustainable part of our retail landscape.”

Click to read about why investors are piling into mega-malls despite online shopping threat.

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Tim Vallance

Head of UK Retail & Leisure at JLL

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