Shift in the retail climate a look at CVAs
Retailers and restaurateurs are reeling from the trading conditions that have battered the sector in recent times. Well-known brands including New Look, Mothercare, Byron Burger and more recently House of Fraser, have turned to CVAs (Company Voluntary Arrangements) in an attempt to manage spiralling costs. Previously an obscure process utilised by the accountants of struggling businesses, they have become one of the most talked about, and divisive topics of 2018.
Put simply, a CVA is an insolvency process by which a struggling business can restructure its liabilities when the only likely alternative is to enter into administration. Sounds good? Not if you’re the landlord of one of the many retailers currently pursuing this controversial procedure.
CVAs are increasingly being considered when companies hold a large number of leasehold real estate interests. In many cases, leases were entered into in better times and are no longer viable in today’s retail market. Advocates insist that they provide a lifeline to struggling businesses and protect jobs, while critics argue that retailers are using them to gain a competitive advantage, leaving their ‘healthier’ rivals at a disadvantage. CVAs were originally designed to allow companies on the verge of insolvency to reschedule their payments to unsecured creditors, yet recent times have seen the rise of ‘landlord only CVAs’, which affects only leases.
Perhaps the most contentious aspect of the CVA process is the voting. For the CVA to gain approval, a company has to secure the votes of at least 75% of its creditors by value; all unsecured creditors are entitled to vote, regardless of whether they stand to be affected. The consequence of which is widespread approval for CVAs as the majority of creditors have a vested interest in the survival of a company, while landlords are forced to reduce rents or are left with vacant units, or both. However, the consequences for landlords are far more wide-reaching than this. Healthier retailers observing their rivals’ real estate liabilities being slashed are using the process to their advantage too. Next, widely regarded as the bellwether of the UK retail market, have used the changing landscape to agree significant rent reductions at lease renewal or obtain landlord contributions to refurbishment programmes. Where they are not obtaining favourable lease terms, they are refusing to renew, an attitude that is likely to be adopted by other retailers as they look to adapt to changing market conditions.
So how did we get here? The devaluation of the pound following the Brexit vote, rising inflation, low consumer confidence, the introduction of the national living wage, aggressive over-expansion and the business rates revaluation have all played their part, but there is a bigger force at play: the internet. Many of us will have enjoyed the convenience of same-day delivery from the likes of Amazon, but speedy delivery is not the only reason these online retailers are steaming ahead of their high street competitors. Their ability to rapidly react to changing trends has allowed them to connect with young consumers in a way that traditional retailers can’t. This summer, Missguided has partnered with hit ITV2 show Love Island, kitting contestants out with items from their summer collection, all of which are available to buy at the click of a button via the Love Island app - fashion doesn’t get much faster than this.
In the face of such fierce online competition, what does the future hold for the high street? Store closures are certain and the disappearance of some household names seems likely. Those that physically require a high street presence such as hairdressers, beauty salons and coffee shops and ‘experienced-based’ offerings such as crazy golf and ‘escape rooms’ are likely to feature more.
It is clear that CVAs, whether directly or indirectly, are undermining the attractiveness of UK retail real estate assets. In good years, retailers signed up for long leases with upward only rent reviews, assuming that a rise in consumer spending would off-set increasing rental values. Some now believe that the turmoil we are witnessing in the retail market could lead to a fundamental shift in lease terms. Turnover-based rents are widely cited to be the most likely replacement for the upward-only rent review clauses featured in so many leases, a shift that would cause all sorts of problems for commercial valuers and the clients they advise. Whatever lies ahead, retailers and landlords alike need to adapt and keep pace with the changing consumer psyche if they are to weather the storm.