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Even The UK’s Best Mass Retailer Is Slashing Its Rents

London Retail

Next is riding out the current turmoil better than perhaps any other mass-market fashion retailer except Primark, remaining popular with consumers and thus profitable even as other chains fall into bankruptcy. But its most recent set of financial results should send a shiver down the spines of retail property owners.

In the six months to 31 July, the company made a pre-tax profit of £320M, up 2.7% from the same period the year before. But the detail it provided on rents and leases are a cause for concern for landlords.

Next said it had renegotiated the rent on 37 of its 507 stores where its lease expires before January. The average rent on these stores has dropped from £12.1M to £8.7M, a fall of 28%. On top of this landlords had agreed to provide average capital contributions of £4.5M to improve stores.

The average length of the new leases is just 4.2 years. That is much shorter than the UK retail average lease length, which is close to seven years, according to Savills.

Next has also started renegotiating its leases that expire before January 2021, and while landlords are providing just £2.5M of capital contributions for store fit-outs on average, the drop in average rents is even steeper, at 30%. Next said the average length of those leases will be 4.7 years.

The effect for Next is very positive — the net rent/sales ratio for these stores drops to 6.5% from 9.5%, meaning that rent makes up a smaller proportion of sales. The stores will have an average profit margin of 26%.

But for landlords, a third off the rent and a shorter lease equate to a big hit to the capital value of the unit Next occupies, likely a third or more. And this is for one of the better-performing retailers.

It is a choice retail owners are being forced to make. Next spelled it out clearly — if these reductions had not occurred, stores would have been forced to close.

Next actually added 100K SF to its portfolio in the six months, 50K SF more than it had anticipated, because it had to close fewer stores than anticipated.

That is only a drop in the ocean of its 8.4M SF portfolio, but any port in a storm. And the level of cuts it needs indicated just how far UK retail rents might still have to go before they bottom out.

Related Topics: UK Retail, Next, UK retail turmoil