In order to track these developments and provide some insight into how the market will develop going forward, Savills are issuing weekly updates.

This week we detail the latest real estate insights compiled from Savills Covid-19 tracker in regards to trends seen in the occupier and landlord space and how they are responding. We also provide some insight from Savills Asia Pacific retail teams to how the market is performing there plus intel on recent administrations, consumer confidence, economic outlook and news from Austria and their plans to start easing restrictions and opening small shops from the 14th April.

REAL ESTATE INSIGHTS (compiled from the Savills Covid-19 tracker)

• The Savills retail agency, investment and property management teams have been collating intel on occupier and landlord developments in response to Covid-19 in our Covid-19 tracker. This tracks store closures, those remaining open, proposed initiatives to reduce costs including proposed requests to landlords, trading updates and acquisition activity. The information from this tracker informs the high-level commentary below.

Occupier perspective

• Again no major shifts this week in terms of how retailers are looking to reduce costs with their landlords. Requests continue to range from rent holidays/deferments for a typical period of three months, a move to monthly rents and/or adoption of TO rents for the period of the crisis. In terms of service charge, retailers are typically asking landlords for this to be kept to a minimum and paid on a monthly basis.

• A new development this week was some occupiers willing to extend leases and/or push back breaks in return for rent-free and in some cases rebased rents. At this point, however, this type of activity remains limited.

• It is important to note, that while some occupiers are pausing expansion there remains a number using the current situation to identify opportunities. These tend to be supermarkets and some well-capitalised new entrants. Beyond these opportunistic occupiers, deals that were progressing have slowed considerably and or stopped as occupiers have furloughed staff including their property teams.

• In terms of pending deals (new letting, regears etc.), we are starting to see occupiers look to include Covid-related clauses that allow them to suspend rent payments if a similar lockdown situation was to emerge again. These Covid clauses are likely to feed through to future deals, with some retailers such as Next and H&M stating that they will also look to pursue turnover only based deals on future space.

Landlord insights

• No real change on last week; landlords continue to deal with occupier requests on a case by case basis. Reluctance to offer rent-free periods particularly for those occupiers where cashflow issues were already apparent prior to the Covid-19 crisis. Typically seeing landlords agree to a three-month rent deferment to be repaid within the next 9–18 months or over the remainder of the lease. There is also a common trend of allowing a move to monthly rents.

• In light of the rent concessions being sought by retail and leisure occupiers, it is no surprise that few landlords were able to secure 100% of their quarterly retail rents. Of those landlords where we have access to this information, the rent collected at the last quarter ranges from 40-60%. It was unsurprising that Supermarket Income REIT received 100% of their quarterly rent reflecting the fact their occupier base are deemed ‘essential’ and continue to trade.

• This non-payment of rents may generate covenant issues for some landlords with many seeking greater flexibility from their lenders in order to avert a situation where they are in breach of covenants and lenders can seize assets.

ASIA PACIFIC RETAIL INSIGHTS (FROM SAVILLS RETAIL AGENCY TEAM)

Hong Kong

• Hong Kong has taken a step back during the last week with a second wave of infections hitting the City. As a result restaurants have been asked to reduce their tables by 50% and to restrict their opening hours (close earlier than normal). Retail stores are all still open but a lot of pain is being felt. At best landlords are giving 50% reductions on a rolling monthly basis, and some retailers have stopped paying rent but this is the minority.

• In terms of outlook the local team expect there to be an increase in vacancies if the current situation continues. Restaurants in particular are being hardest hit and many will close as a result.

China

• There was some initial positivity in China but the market seems to have taken a slight step back. Cinemas were about to re-open at the back end of last week (albeit with restrictions in place in terms of numbers entering cinemas) but they have since been ordered to close again. A number of service type operators like hair salons and gyms that had re-opened are also having to close their doors again.

• Luxury spend has picked up in China over the last week or so with more people spending on luxury products (rather than on international travel).

• While many of the shopping malls have re-opened and footfall is slowly starting to increase, operators and consumers remain very cautious.

Headline retail insights

Footfall trends

• Considering the current lockdown there is little change to footfall trends. NWEC reports that footfall in London’s West End remains significantly down year-on-year. Nationally Springboard reported footfall for week commencing 29th March was down 81.4% YoY and down 31.6% WoW. A similar trend was seen across all parts of the retail market. For London’s West End, footfall was down 94.6% year-on-year for week commencing 30th March and down 24.1% WoW.

• Springboard did highlight some interesting weekly trends in that while footfall continued to decline, the drop last week was only around half of that in the week before reflecting the fact that consumers have already restricted their shopping behaviour.

• While retail parks are showing similar declines in footfall on a weekly basis, there are some differences when looking at specific days. Springboard noted that as the week progressed the drop in footfall became more modest for retail parks reflecting the fact that people were going out later in the week to do their food shop. For example, the change for Sunday and Monday averaged -67.5% wow while the wow decline only averaged 7.8% between Tuesday and Friday.

Retailer, operator and landlord insights

• GFK’s consumer confidence tracker: UK consumer confidence in the first two weeks of the lockdown recorded its largest ever decline since the tracker started in 1974, falling by 25 points compared to confidence levels recorded in early March to -34. The last time a decline of this nature was seen was during the GFC. The length of the lockdown, which will have a bearing on the wider economy, will determine future consumer confidence and with it retail sales performance.

• Business Rate windfall for supermarkets: It is estimated that the 12-month Business Rate holiday being offered by the Government to mitigate the impact of the Covid-19 crisis on the retail and leisure sector could save the supermarket sector an estimated £3bn. In company statements, Sainsbury’s stated a £567m saving with Morrison’s reporting £310m. It is estimated the saving to Tesco could be in the region of £700m. This, alongside recent strong trading, is supporting continued acquisition activity by some operators in the market aided by the potential for enhanced opportunities.

• Administrations: There were more occupiers that entered into insolvency over the last seven days, including Cath Kidston and Debenhams. Reports suggest that Arcadia are also exploring options. It is important to note that these retailers were already struggling with operational challenges, which have been exacerbated and accelerated by the current Covid-19 crisis. We are actively tracking a number of other occupiers in terms of their financial stability in order to assess those that are more likely to survive or fail under the current climate.

News from other international retail markets

• There was some interesting international news from Austria yesterday. Their government announced that they would be easing its lockdown measures from next week, however, they announced that this would be dependent on its citizens abiding by social distancing rules.

• The aim is that from 14th April smaller shops up to 400 sq m in size including hardware and garden stores would be able to open again, albeit under strict security conditions. If their timetable goes to plan larger shops could reopen on 1st May with hotels, restaurants and other services potentially open in stages from mid-May. The government did stress that if there was a second wave of infections they may be required to re-introduce restrictions.

• Austria went into lockdown on 16th March, a week before the UK, with its restrictions and guidance on social distancing in place ahead of this. This does not necessarily translate into a similar timeline for the UK, but it does provide some insight into how restrictions could be eased here.

Economic insights

• Oxford Economics in their latest global outlook highlighted that signs are emerging that the growth rate of Covid-19 cases may be starting to slow in a number of hotspots, suggesting that lockdowns are working. However, it is also becoming increasingly clear that the economic costs in China and the rest of the world will be significant.

• They suggest that China could see a double-digit quarter-on-quarter fall in GDP in Q1 that would exceed their baseline forecast of a -9% decline. The previous Q2 rebound they were forecasting is likely to be swamped by falling activity in the US and Europe.

• Oxford Economics still think that global GDP growth in H2 will rebound sharply. However, the scale of decline in H1 suggests that full-year 2020 global GDP will contract surpassing the 1.1% drop recorded at the height of the global financial crisis. The question is how quickly the global economy can recover in 2021.

• In terms of the UK, Oxford Economics notes that Q4 GDP was relatively weak meaning the economy lacked momentum even before the Covid-19 crisis. UK GDP is now in the midst of a deep contraction, but they suggest the rebound should be sizeable. They note that a likely surge in the household saving ratio over the coming months should help create the foundations for the recovery. However, my personal view is that this potential rebound could be mitigated by higher unemployment once the current crisis subsides.