Retail 2012 – a showdown between administrators and landlords?

A very experienced insolvency practitioner who has acted as administrator on some of the most high profile insolvencies of well known British retailers recently mentioned to a colleague that:

“The main problem facing retailers today is that rents are too high.  Landlords will need to accept that if they want their businesses to survive they will need to reduce significantly the rents payable.”

There is undoubtedly truth in what this IP says; if landlords reduced rents then margins would increase and/or retailers could reduce prices to make their goods more attractive to you and me.  There we go then; in one foul swoop we can fix the problems of the high street, make British retailers more profitable thus increasing tax revenues for Her Majesty and, as Gordon Brown once said “save the world” .
There is just one small problem with this hypothesis; in reality it is nothing more than window dressing.  Put another way, what is being suggested is in effect seeking to simply alter a different variable in a rather complicated equation where ultimately the same final answer always applies:

TRS = RP + BI + LP + BI;

where

TRS = Total Retail Spending;
RP = Retailer's Profit;
BI = Bank Interest; and
LP = Landlord’s Profit.

This is obviously an oversimplification of where the money spent on the high street actually goes but it is sufficient to highlight that by reducing rent what in effect happens is that LP decreases so that RP increases.
This equation also highlights another important factor; that of Bank Interest.  This affects both retailers and landlords alike and once again highlights that in reality the real issue which is damaging the High Street is debt.
In fact the one common factor affecting all three contributors to the equation (retailers, landlords and, just as importantly, the consumer) is debt.  Therefore the IP quoted above could have been more accurate if he had stated that the main problem facing retailers today is that there is too much debt in the economy.  So why not say this?
A number of answers spring to mind (in increasing accuracy):

1. IPs are generally appointed at the behest of the banks.  It would hardly be sensible for IPs to bite the hand that feeds them.
2. Banks have already taken significant hits so is it realistic to expect them to take further hits?
3. Landlords rely on tenants.  If tenants cannot pay the rent then landlords will ultimately lose out.  High rents can only be justified if there is a willing tenant.

I believe that the IP quoted was expressing the view that the average level of rents on the high street is so high that it is not reflective of the economic realities in which we live and were we to test the market then the average rent would fall significantly.
He is right but averages are misleading.  In reality there are a lot (easily the majority if not the vast majority) of retail sites where the rent is too high and should be cut.  However, there are a lot of sites where the rents could go higher as the landlord could easily re-let the property to another retailer if it became available.  Bond Street is an example but so are certain locations on Oxford Street or in major shopping centres such as Westfield London or Bluewater in Kent.
A recent review of the high street predicted a significant increase in the number of retail insolvencies in 2012.  The prediction is that those retailers with 50-500 stores will be worst hit.  What this is likely to mean is that CVAs which had been utilised a lot in 2007 and 2008 to save a number of retailers (or at least delay their demise by a year or two) is less likely to be successful.  If the IP is right in order to survive these retailers will need to do more than simply close sites; they will need to reduce the rents on a significant number of sites that are to remain open.  This is yet to be achieved through a CVA and the most well-known attempt at such a large scale CVA routed rent reduction (Stylo in 2008) was a total failure.
Therefore we are more likely to see a significant increase in administrations (as we have already in the last few weeks).  The courts to date have provided a significant amount of leeway to administrators by protecting them against claims for forfeiture by landlords even where landlords have been able to show they have alternative tenants to the administrators’ preferred assignee.  However landlords have seen some successes; most notably in the case of Goldacre (Offices) Limited v Nortel Networks (UK) Limited.  Yet even this decision is now being turned by administrators to their advantage with a refusal to pay any rent for the quarter during which they are appointed on the basis that they are appointed after the quarter day.
My prediction for 2012 is that we will see this issue and many other similar issues relating to the rights and obligations of administrators to make use of premises litigated through the courts.  So 2012 may prove bad for the high street but it is likely to provide ripe pickings for the IPs, real estate insolvency lawyers (like me I must admit) and real estate litigators.  Every cloud must have a silver lining; at least for some of us.

Why social animals will preserve the City of London

I heard on the news today that officially today (17 January) is the most depressed day of the year.  Post-Xmas debt is at its maximum; the weather is invariably dark and dreary; the newness of the presents has worn off and, frankly, there is just nothing to look forward to.

View from Paramount in Centre Point

This evening, as a bit of a pick-me-up on such a depressing day, I went with a few colleagues to the Paramount Club which is based on the top floors of Centre Point above Tottenham Court Road Station.  Before you think "how pretentious" this is not some private members' club and this was my first visit (but will not be my last).  The views of London are truly stunning (see rather poor BB photo) and, probably, unbeatable although once completed The Shard might give it a run for its money.

Looking down across the West End and to the City and Canary Wharf I considered the following issue:

As businesses constantly consider ways to drive down costs and as technological advances continue to increase the ease with which work can be carried out in any geographical location how can expensive areas such as the City of London and Canary Wharf expect to be around in, say, 50 years time?

The truth is that I do not know the answer but I can posit one possible reason to remain optimistic - human beings are social animals.  Nothing proves this more than the growth in the use of social media over the last 2 to 3 years.

It might be thought that it is that same growth in social media which threatens the very bricks and mortar I believe it is likely to save.  But this all depends on how you view the various social media platforms (e.g. Facebook, Twitter, LinkedIn).  Are they intended to replace physical proximity or to facilitate it?
From personal experience I believe that they cannot replace it.  They can replicate some of the closeness originally only available by talking to someone face to face or, since the invention of the telephone, at the other end of the line.  With improved video conferencing face-to-face will be possible without leaving your desk.

However, no matter how much they improve and become part of our lives they cannot replicate one important element - the shared experience that comes in being in the same place at the same time.
Being a social animal is not about simply talking to and communicating with others.  It is about sharing experiences with them.  If this were not the case why do banks have huge trading floors?  It cannot be just about the communication but rather the need for physical proximity.

This human requirement is something which resonates particularly within the client-adviser relationship.  The uninitiated might have thought that with all the forms of communication available today there is no reason why an adviser should ever physically meet a client.  Yet, I am confident that if you ask most (if not all) clients which of their advisers they "trust" the most it will be the ones who they meet up with every now and then.  The others might e-mail them; might link with them on LinkedIn or follow their tweets on Twitter but none of that is a replacement for sitting together at a table just chatting.

So for as long as human beings remain social animals the City and Canary Wharf will be well populated.