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Now Even The Good Retailers Are Demanding Big Rent Cuts

A busy Primark

Struggling UK retailers have been demanding rent cuts for the past 18 months, and getting them by either using the CVA process or in direct negotiations with landlords. Now, even those retailers that are doing well are calling for significant rent cuts.

One of the success stories of retail over the past decade, fast fashion chain Primark, is seeking cuts of up to 30% in rents across its estate of 189 UK stores, according to the Sunday Times.

Primark’s property team has been told by senior executives at the company’s owner, Associated British Foods, to “go and get rent reductions,” The Times said. The company is said to feel it is unfair that their competitive advantage is being eroded by worse-performing retailers using the CVA process to reduce their property costs.

In exchange for the cuts it is willing to take longer leases, so landlords can maintain the value of their properties. Primark does not sell online.

The move mirrors that of Next, another retailer that is doing relatively well and has sought rent cuts to keep its profit margin as high as possible. The company is achieving rent cuts of up to 30% in some stores, it said in results earlier this year. Last year it threatened to put CVA clauses into leases so that if rival retailers achieved a rent cut in a store near to one of its own, it could reduce its rents by the same amount.

A research note from Green Street Advisors late last year diving into the financial performance of companies like Next highlighted the issue for retailers. In 2014 Next’s sales per square foot from its store estate was close to £320/SF, but by the middle of 2018 that had dropped 15% to £270/SF. Since rents had not dropped, that increased its occupancy cost ratio from 9% to close to 10.5%, meaning that its stores became less profitable.

Falling rents are having a hugely detrimental impact for retail owners. If rents fall 30% then capital values of assets fall by the same amount in situations where the yield at which retail assets are valued stays the same. But retail yields have risen by about 20% in the past 18 months, amplifying the fall in value created by rent cuts even further.

And that is for the good retailers. In delayed financial results released late on Friday, Mike Ashley’s Sports Direct said the House of Fraser department store chain it bought last year faced possibly “terminal” problems. It said some of its stores are unprofitable even where they are paying no rent at all.