The COVID-19 pandemic has dealt an irrevocable blow to U.K. shopping center rents, according to the CEO of one of the country's largest listed landlords.
Speaking during the European Public Real Estate Association's Insight webinar event Jan. 5, Landsec CEO Mark Allan said his company is focused on when retail rents will reach a sustainable level, rather than whether they will fully recover. Landsec owns several large shopping centers throughout the U.K. worth billions of pounds in total.
"With regards to shopping centers and when [rents will] get back to pre-COVID levels, the honest answer to that is never," said Allan.
Retail rents had already been in steep decline prior to the pandemic. The rapid growth of e-commerce in recent years has hit revenues at many brick-and-mortar retailers, prompting a slew of insolvencies as traders struggle to stay afloat.
The COVID-19 pandemic compounded the sector's misery. U.K. government measures to control the spread of the coronavirus have hammered footfall and forced the closure of non-essential retail for lengthy periods. The most recent national measures for England were announced Jan. 4 and are expected to remain in place until at least mid-February.
The impact of the pandemic on U.K. retailers has fed through to landlords. Rent collection 60 days after the September 2020 quarter due date stood at 72%, according to commercial property software management firm Re-Leased. This compared to 60% for 60 days after the June quarter due date, 59% for 60 days after the March quarter due date, and 84% for 60 days after the December quarter 2019 due date.
A large drop in rent collected from retail tenants contributed to a £118 million fall in Landsec's net rental income in the six months to Sept. 30, 2020, compared to the same period in 2019. Landsec received 51% of rent due between March 25, 2020, and Sept. 28, 2020, from tenants in its regional shopping centers, according to its fiscal year 2021 first-half report. The company received 50% of rent due for the September 2020 quarter on Sept. 29, 2020, from those same tenants.
Landsec's shopping center portfolio is split between the U.K.'s regions and London, with the majority located outside the capital. The company's regional shopping center portfolio accounted for 11% of its total property portfolio value, as of the end of September 2020. Other retail, which includes outlets, retail parks, and London-based assets, comprise 16% of its total portfolio value.
Retail made up close to half of the company's total portfolio value until recently, but severe cuts to the value of retail property have diminished its role. The six months to Sept. 30, 2020, saw another significant revaluation of Landsec's retail portfolio, with the value of regional shopping centers reporting a 20.4% decline during the period, while outlets saw an 8.8% decrease.
Despite the severe impact of the pandemic on Landsec's shopping center portfolio, Allan said that it could help rents reach sustainable levels much quicker than would have otherwise occurred.
"Perversely, the acceleration from COVID we're now going to see in [retailer insolvencies] over the next 6 to 12 months will actually be helpful, ultimately, because it will get us to a sustainable level," he said. "That, plus understanding what happens on the supply side and how much retail floor space gets taken out of the market and repurposed. The quicker that happens, the better."
Rapidly changing outlook
Allan, who took over the role of CEO in May 2020, said he is surprised at how quickly the outlook for investment in retail property has changed in the last year. "I wasn't expecting coming into the Landsec role to be saying that I felt within 12 months, retail could start to look interesting," he said. "I now think within 12 months retail will start to look interesting."
Allan also forecast that Landsec's retail outlets business would rebound from the pandemic quicker and stronger than any of its other subsectors. The company's outlets business would have recorded rental and value growth in the six months to Sept. 30, 2020, without the impact of COVID-19, said Allan. Instead, Landsec's outlets portfolio saw its value fall by 8.8% and rental values fall by 1.3% compared to the same period in 2019.
"[The outlets are] all turnover linked, so it's all about footfall and sales," said Allan. "In between the various lockdowns we've seen a very strong bounce-back in demand there, and I expect that to be exactly the same as and when we come out of the pandemic."
"It is a very long time since any of us have been to the cinema or indoor-skiing or bowling, all of those things," Allan added. "We will see a very strong bounce-back in demand for that, just simply because of the length of time over which people haven't been able to do those sorts of pursuits."
Allan reiterated his belief that the impact of the pandemic on offices, which make up 57% of Landsec's total portfolio value, provides the company with opportunities. Demand for the kind of "prime, Grade A, modern, sustainable, healthy workplaces" owned by Landsec is likely to soar, while demand for secondary office assets that Landsec can acquire and redevelop will plummet, he said.