The Loan Market Association held a panel discussion last week on “financing in the retail real estate sector”. Unsurprisingly, following a string of high-profile insolvencies of retailers, there was much lamenting about the current state of the sector.
The panel shared the view that retailers’ problems were not just cyclical, but structural (with Brexit only being mentioned five times). Accordingly, the retail real estate sector would need structural solutions.
One (landlord side) panellist declared that the old institutional full repairing and insuring lease model, typified by long terms and upward only rent reviews, was broken. In his view, the overriding concern should be to get units occupied and to achieve that landlords must be prepared to be flexible by accepting, for example, shorter lease terms, turnover rents or licences to occupy for pop-up stores.
The panel also discussed re-purposing and the need to think outside the box in order to ensure that old retail spaces could continue to be profitably used. Pick-up, drop-off ("PUDO") and click-and-collect were mentioned as key parts of retailers’ strategy, along with activity based tenants, to improve footfall and profitability of the larger retail schemes as a whole. More radically, the mindset of landlords would need to change. Retail operators should be viewed less as traditional tenants and more as business partners who they are willing to back.
The lender side panellists were optimistic that they too could adapt to an operator-focused, instead of property-focused, model. Real estate lenders would need to carry out greater due diligence on the underlying operator and their business plan than has historically been the case, but this is an approach that is already familiar to lenders in the leveraged finance space.
In any event, the senior lenders would be hesitant to take on more risk, which almost certainly means they would be lending at a much lower loan to value ratio than is currently the case for retail property financing. This could leave a funding gap and, perhaps, provide more opportunities for less risk-averse junior lenders.