Savills are continuing to track trends emerging through the current Covid lockdown, and the likely read through for landlords and investors through our regular market updates.

In this note, we detail headline insights in terms of footfall trends, retailer updates and administrations. We have also highlighted some early intel in terms of profitability challenges facing some essential retailers and what the potential read through for landlords could be. In addition, we have examined some early trends we are starting to see in the private equity-owned space. This update also includes insights from Savills European and Asia Pacific retail agency teams including a review of lockdown relaxations in Europe and how continued social distancing measures may mitigate a full recovery in some parts of the retail and leisure market once the UK comes out of lockdown.

HEADLINE UK RETAIL INSIGHTS

Footfall trends

• In a normal market, we would be examining footfall compared to the same period last year. At this point in time, this is not relevant with the week-on-week (WoW) comparison being of more use. Based on latest data from Springboard covering the 12th to 18th April total UK footfall declined 6.2% WoW, although driven by significant declines due to the Easter weekend as footfall rose on a weekly basis on three of the five subsequent days of the week.

• Interestingly, high street locations reported more resilience with wow footfall down 4.2% versus the 8.4% and 8.2% for shopping centres and retail parks respectively. Although we suspect the larger decline for retail parks reflects food stores, many of which are found on retail parks, being closed/reduced hours on Easter Sunday and Monday.

Retailer, operator and landlord insights

• John Lewis published their annual results on the 21st April covering the 12 months to 25th January. What was of more interest was the insight they provided to trade performance during the current lockdown period. Key takeaways detailed below;

• From 26th January to 18th April sales are down 7% YoY, for the five weeks to the 18th April (just before the lockdown came into effect) sales are down 17% YoY.

• There were significant increases in JL’s online offer and at Waitrose, albeit not enough to offset group declines. Waitrose sales were up 8% YoY since the 26th January. Online sales were up 84% YoY since the middle of March, however, with this online demand driven by less profitable product lines (technology, food preparation, keeping fit and looking after/entertaining children) this uplift is unlikely to have a significant positive impact on profitability for JL’s online business.

• The Partnership’s worst-case scenario for FY 2020/21 performance is that sales at John Lewis will decline by 35% driven by significant sales decline between April and June, and weak sales thereafter at Waitrose it would result in a more modest decline of less than 5%.

• The 12-month business rates holiday for England and Scotland will save the partnership around £135m this financial year. The Partnership noted that this, alongside the government’s deferred payment of VAT until March 2021, will help their short-term cash flow.

• Are essential retailers facing profitability challenges? The general consensus is that those retailers that have been able to remain open (deemed as essential) have benefited from increased trade, and in turn, improved margins. For landlords, this suggests that they are better placed to pay their rent. Anecdotally, this does appear to have been the case to a certain extent during the early week(s) of lockdown due to panic buying. However, the implementation of social distancing measures is now starting to temper in-store sales and margins as retailers have had to increase staff levels in order to implement these measures. For example, anecdotal reports suggest that one value grocer has seen a recent 40% decline in in-store sales due to social distancing measures.
  
  In addition, some essential retailers have had to close stores in less populated areas/lower footfall locations such as city centres and shopping centres, which is exerting pressure on total sales performance and margins. Those with an online offer are perhaps better placed to counter this challenge, highlighted in the recent announcement by Aldi that they were launching an online service delivering food parcels. For landlords, this potentially raises questions about a tenants ability to pay full rent, even where the store remains open, and something we will be watching closely as we move forward.

• Administrations: Debenhams entered into what it describes as a ‘light touch’ administration to protect it from legal action from creditors while its department stores are closed. It will shut seven stores (including its store at Westfield London) with the remaining 120 remaining in place as the retailer was able to agree concessions/new terms with landlords, the majority of which meant a shift to turnover rents. The retailer is still trading online while its shops are closed. The structural shifts in the fashion sector, exacerbated by the Covid lockdown, claimed another victim with the Oasis Warehouse Group going into administration last week affecting 92 standalone stores and more than 400 department store concessions.
  
  These challenges are mirrored in French Connection’s recent appointment of a financial adviser to help it turn the business around after terminating the process to find a buyer. News reports suggest the turnaround will focus on right-sizing its store portfolio. In the F&B sector, the UK arm of the Belgian-owned bakery chain Le Pain Quotidien could fall into administration next week unless a buyer is found for the 26-site café business.

• Private equity/owners looking to exit: A common trend over the last few years has been the increase in private equity (PE) ownership of retail and F&B brands, but the current Covid crisis could see a flurry of these owners now look to exit. Pre-Covid, some of these PE-owned/backed brands were already looking to exit as investment targets had been met and/or the structural issues facing the sector alongside rising operational and occupational costs were limiting short-to-medium-term growth prospects making longer holdings less attractive. These ‘sell’ drivers have been exacerbated by Covid reflected in the fact that the PE owner of TM Lewin and the privately-owned Office Shoes have recently been put up for sale. We expect this activity will increase over the coming months, including business restructures.
  
  As seen with Cath Kidston, we may also see a number of PE-owned brands that enter administration bought out by their owners on a pre-pack deal that allows them to acquire the brand and any associated e-commerce platform, wholesale and franchise business but not the stores. This effectively deleverages them from significant occupational costs during a period where stores are shut. An increase in this type of activity means understanding the ownership and debt position of occupiers is vital right now as this will shape decisions for both potential buyers of these brands and landlords, something Savills is already collating for the UK's top 100 retailers.

EUROPEAN RETAIL INSIGHTS (FROM SAVILLS RETAIL AGENCY TEAM)

• The start of lockdown relaxations are beginning to emerge in some European markets and will provide valuable insight into how other European markets may start to recover once they come out of their respective lockdowns.

• What is apparent from Austria who were the first to relax restrictions in Europe, and the experience of China, is that social distancing measures will continue to exert trading and profitability challenges for retailers/occupiers even once lockdown is relaxed. This suggests the financial implications for landlords are likely to continue beyond lockdown.

Concessions & rent payments

• Similar requests to that seen in the UK across various European markets; landlords dealing with requests on a case-by-case basis with tenants typically requesting rent deferments, reduced rent payment or rent-free including the postponement of service charge for the period of the lockdown.

• Mixed response from landlords with the general approach being a move to monthly rents. In Germany, we are seeing some landlords grant rent-free periods, but requesting interest on non-payment is applied.

• Some quid pro quo options are being considered by landlords in order to grant concessions such as break clauses/lease extensions, trading exclusivities removed/reduced, deferred rent repaid in turnover top-ups for the remainder of the term (Ireland).

• Some tenants proposing that following the reopening of stores, they will switch to turnover rent until trade returns to pre-Covid levels. Others are proposing to amend existing leases with a switch to a turnover-based rent.

• Seeing some retailers looking to insert Covid/pandemic-related clauses into existing and future lease agreements.

• Government support for landlords across Europe is limited, however, in Sweden, there is a support package. If the landlord agrees to a lower the base rent for retailer/F&B tenant, the government will cover 50% of the reduced rent. This is a welcomed initiative, but as compensation needs to be applied for after the concession, there is some concern that this compensation may not be paid.

Acquisitive sectors and retailers

• Some retailers are seeing the current situation as an opportunity to secure new space on attractive terms. Domestic supermarkets & pharmacies are the most active across Europe. Some local-based restaurants also showing signs of activity (Germany, France and Spain) as are dark kitchen operators (Italy).

• A number of international brands are also looking at some European cities as an opportunity and taking a longer-term view, albeit remain conservative. This is reflected in the fact that the Savills European team were able to exchange/complete on several new leases during the lockdown. It is important to note that this tentative interest from international brands is very much focused on prime locations in key destination cities including Milan, Madrid and London, a trend we expect to continue post-lockdown as markets recover.

Lockdown relaxations

• A number of European economies are in the process of relaxing lockdown measures, we detail these proposals below, and any early trends in sales and footfall;

• Austria: one of the first countries to ease lockdown measures. Small stores with a sales area of less than 400 sq m and hardware and gardening outlets have been given permission to reopen. However, social distancing measures are restricting footfall and sales. If the reopening doesn’t lead to a surge in infections, shopping malls and all other stores in the country will be allowed to reopen on 2nd May followed by schools, restaurants and hotels in mid-May

• Italy: the government has allowed bookshops, stationery stores and clothes retailers for young children to reopen on a trial basis. However, the country is still in a state of nationwide lockdown until the 4th May with some regional authorities choosing to keep these retailers closed.

• Germany: retailers whose shops are up to 800 sq m were allowed to open this week, along with car and bicycle dealers, and bookstores of any size subject to strict social distancing and hygiene rules. Hairdressers and barbers will be allowed to open from the 4th May, provided they have protective measures in place. However, bars, cafés, restaurants, cinemas and music venues will all remain closed until 31st August.

• Switzerland: a gradual relaxation of restrictions is expected from the 27th April. Unlike Germany, hairdressers, massage and cosmetics parlours will be the first businesses to reopen. Shops and markets are expected to be opened form 11th May.

ASIA PACIFIC RETAIL INSIGHTS (FROM SAVILLS RETAIL AGENCY TEAM)

• Green shoots of recovery are emerging in China and Hong Kong, particularly for international luxury and aspirational brands. Yet, social distancing measures are presenting challenges, particularly for F&B and leisure sectors in terms of cash flow and profitability. We would expect to see a similar trend for F&B and leisure sectors in the UK once the lockdown is eased but social distancing continues.

China

• Shopping malls across a number of territories have been open for several weeks. At this point, a number are now reporting an average of 60% footfall recovery on weekdays and 80% footfall recovery at weekends. Evening footfall, however, remains very weak.

• Landlords are trying to counter weak footfall/support recovery and increase dwell time by offering incentives such as free all-day car parking to shoppers.

• Aspirational and luxury brands are seeing a stronger recovery in spend. Hermès reported sales of $2.7 million on the reopening day of its flagship store in Guangzhou’s Taikoo Hui. The single-day tally (believed to be the highest for a single boutique in China) has offered a confidence boost for luxury brands. Some aspirational fashion brands (including the likes of Lululemon, Sandro, Maje, etc.) are reporting that sales are c.60% of YoY sales volumes. We may not see the same trend in UK/Europe as Chinese consumers are the largest single consumer group in terms of luxury spend.

• Mass market fashion retailers are reporting a slower recovery, particularly domestic Chinese brands.

• Restaurants are largely open and trading reasonably but the expectation is that the recovery for this sector will be slower, particularly in light of continued social distancing and in turn capacity restrictions. Restaurant chains targeted at families are seeing the slowest recovery as it is mostly young people dining out at lunchtime and dinner rather than families with their older relatives. According to some restaurant chains, while the last few months have been very difficult (catering sales dropped 43% in Jan/Feb in China), they are more concerned for Q2 as they no longer have landlord incentives/concessions to support them while consumer confidence to dine out remains weak.

• Cinemas are still closed, and gyms have reopened with staggered entry levels. The Government is considering reopening Disneyland Shanghai in May but allowing a 30% footfall capacity to start with.

• The Savills retail team are seeing an improvement in retailer acquisition interest with brands looking at potential new locations for when the worst of the pandemic is over.

Hong Kong

• All shopping malls have reopened, but footfall is down c.40% compared to pre-Covid levels. It is very much ‘business as usual’ although there are no internationals flying in and out of HK at this time, so consumer spending is very localised.

• Precautionary measures have been put in place across public building such as shopping malls, office buildings, etc. whereby people are having their temperature checked on a regular basis to identify any new Covid-19 cases early.

• There have been very few permanent closures of retailers and restaurants over the last few weeks, and certainly no high-profile brand closures (the majority are local brands) but this could, and is likely to, change over the coming weeks.