Will retail property hurt your Reit?

Struggling department stores could be bad news for your property investments, says Sarah Moore.

945_MW_P30_Inv-Prop

Debenhams is closing almost half its stores

Struggling department stores could be bad news for your property investments

Debenhams is rarely in the news for positive reasons. Last week, the department store named the 22 of its 50 stores that it will be closing next year, a move that will affect 1,200 staff. This is yet another sign that department stores may not be long forthis world. But it's also a reminder to look at whether this could affect your property investments.

Investment bank UBS has examined 50 UK shopping centres owned by four real-estate investment trusts (Reits) British Land, Landsec, Hammerson and Intu and found that 20% of the total shopping-centre floorspace owned by these funds was let to retailers classed as in "CVA/admin". This refers to stores with a company voluntary arrangement or in administration, or "shrinking": those within the top-100 retailers by floorspace seeing declining sales.

Long-term risks

It may involve repaying debt at a reduced level, or over a longer period than initially agreed. Importantly, a CVA can impose rent reductions on landlords, or in some instances allow retailers to back out of leases altogether. Landlords therefore don't want many of their tenants to be in this situation.

In UBS's view, the Reits' exposure to struggling shops poses long-term risks, including lower rental-growth prospects and higher vacancies. Hammerson and Intu have the highest exposure to CVA/admin or shrinking retailers, at 24% of floorspace each, with British Land and Landsec at 20% and 13% respectively. By category, 66% of Hammerson and 54% of Intu's shopping-centre space is occupied by fashion and department stores, "likely the most heavily disrupted by e-commerce".

It is worth noting that the four Reits have themselves declared much lower levels of exposure to CVAs, albeit via a different, more traditional, measure, reporting between 1.7% and 4.1% of rental income affected by CVAs. Intu suggests that replacing department stores, which traditionally pay low rents, with new tenants may actually bode well for future rental growth. It's also important to look at the exposure to struggling stores within the context of the funds' property portfolios as a whole. For example, 49% of British Land's portfolio is invested in offices. However, it's clear that British retail's struggles are far from over. So if you are invested in commercial property, keep an eye on your exposure, and make sure your fund is sufficiently diversified.

Recommended

Which house-price index is the best?
Property

Which house-price index is the best?

Britain is obsessed with house prices, and we have at least four house-price indices to choose from to measure the rate of increase in the value of ou…
1 Jun 2023
Is it time to give up on buy-to-let?
Property

Is it time to give up on buy-to-let?

The number of buy-to-let mortgage products has plummeted in recent weeks, placing further strain on a market in which landlords already seem to be giv…
31 May 2023
Where will house prices go in 2023?
House prices

Where will house prices go in 2023?

We explore what could happen to house prices in 2023 as the market continues to slow down.
22 May 2023
Renters’ reform bill: what does it mean for landlords and tenants?
Property

Renters’ reform bill: what does it mean for landlords and tenants?

The Renters’ Reform Bill, which promises an overhaul of the private rented sector, is currently being discussed by parliament. We look into what it co…
17 May 2023

Most Popular

How much will it cost you to retire early?
Pensions

How much will it cost you to retire early?

The pre-state pension income gap means couples may need an extra £136,000 if they want to retire at 60 – can you afford to retire early?
6 Jun 2023
Best debit and credit cards to use while travelling abroad
Personal finance

Best debit and credit cards to use while travelling abroad

If you’re going on holiday or travel abroad regularly, it’s worth knowing what the best card is to avoid hefty fees. We weigh up the charges and any p…
6 Jun 2023
Best easy access savings accounts – June 2023
Savings

Best easy access savings accounts – June 2023

Rising interest rates have boosted the returns on instant-access savings accounts and we're seeing some of the highest rates seen in years. We look at…
8 Jun 2023