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HMV store closures throw spotlight on shopping center rents, Intu

Canada's Sunrise Records has swooped in to rescue U.K. music store chain HMV Group PLC from insolvency, a move that will keep 100 of the chain's 127 stores open. While it is a rare case of good news for the U.K.'s beleaguered retail sector, it nonetheless throws an unwelcome light on how retail landlords price rents in shopping centers.

A surprising number of the closures will occur at some of the country's largest prime shopping centers, stores that are likely to have been among HMV's best revenue generators, according to retail analyst and consultant Nick Bubb. Sunrise Records' decision that it could not make these stores viable suggests that the rents set by the landlords at these shopping centers were an issue, Bubb said in a Feb. 6 note.

Independent retail consultant Richard Hyman, who has advised some of the U.K.'s largest retailers and retail landlords, said in an interview that the traditional way retail landlords set rents no longer works.

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Intu's Victoria Centre in Nottingham, U.K., is among the
locations at which HMV will keep its store open.
Source: Intu Properties

"Having a system that's evidence-based is just not economically viable," he said. "It leads to all sorts of jiggery-pokery. If you can find someone stupid enough to pay a high rent, that sets the rent for the rest of the center without reference to what business you're going to do in that space. That's ridiculous. That doesn't work anymore."

Retail rent levels have become a particular point of friction between landlords and tenants as U.K. retailers face growing competition from e-commerce, low consumer spending growth and economic uncertainty surrounding Brexit. Retail tycoon Mike Ashley vowed in November to shut all 15 of his stores at Intu shopping centers after a dispute about new rent terms for four House of Fraser outlets, a brand he rescued from insolvency in August, according to the (U.K.) Times.

The shopping center model means landlords are particularly prone to setting rent levels that retailers might struggle to make viable, said Hyman. "A shopping center is a sort of purist form of retail landlord because it's one landlord in one location. Major shopping locations that aren't in purpose-built shopping centers usually involve lots of different landlords [that compete for tenants and set different rents]," he said.

"Most of these landlords are going to have to change the way that they do business completely because there's a complete disconnect between the rental levels and the sort of business that you can do at these spaces," he added.

Intu Properties PLC, which has faced a string of bad news over the past year, is the biggest loser among U.K. real estate investment trusts with exposure to HMV. Seven of the 27 stores closing are at Intu-owned properties and represent 0.2% of Intu's rent roll, the company told S&P Global Market Intelligence in an emailed statement. Another eight HMV stores at Intu properties will remain open.

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