Some of the biggest news this week has been around the retail sector. Unsurprisingly given the current circumstances, the restructuring and job losses continue with iconic department store business Selfridges, announcing that it is shedding 450 jobs, amounting to 14% of its workforce. UK retail institution John Lewis released radical plans to become ‘digital first’.
Going forward, Sharon White, the relatively new CEO, expects John Lewis department stores to generate 60% of business from online compared to the pre-coronavirus level of 40%. Retail floor area will shrink but they want to ‘put excess space to good social use’.
Warning that retail margins are too thin, the business is looking at expanding its financial services offering and venturing into new mixed-use affordable housing and horticulture. Shops will remain crucial to the brand but in support of online. There are some big changes ahead.
With overall UK retail online sales hitting 32%, up from just 18% in September, the question is whether shoppers will stick to their online habits post COVID or whether browsing in a bricks and mortar shop will still prove to be an attraction.
In other retail news, excitement was engendered by Legal & General’s announcement of a new turnover rent based commercial leasing framework for its retail and hospitality occupiers. Whilst other landlords have been moving to turnover rents to help tenants through the COVID crisis, Legal & General have announced that they are launching a new leasing model across their entire £4.5bn retail and leisure portfolio. Retailers and hospitality businesses will be offered four leasing structures focused on rents linked with turnover.
The most flexible, aimed at emerging brands, will be for up to three years on turnover rents. More established tenants will be offered leases of between three and five years, with turnover rents and break clauses linked to in store sales. This is likely to up the bar for other institutional landlords.
Legal & General’s statement that ‘our role as owner is shifting from what was solely ‘the librarian’ (collecting rent, renting shops and cleaning spaces), to becoming an ‘editor’ of the space’’ grabbed the headlines on both sides of the Atlantic. Of course, in the USA the expression is ‘revenue sharing’ as opposed to our term ‘turnover rent.’ As they say ‘two nations divided by a common language’!
There can be difficulties in assessing retail turnover rents particularly as sales in these days of ‘omnichannel’ are not only though the till but also on line, and then with online there are issues such as taking into account returns.
Turnover rents/revenue sharing leases were a topic discussed in the latest Fifth Wall VC Fund Fly on the Wall interview conducted by California based Co-Founder and Managing Partner Brendan Wallace with London’s Ross Bailey, Founder of pop-up platform Appear Here. Bailey made the point that in1992 the average lease length was 20 years and is now ‘a couple of years’. Bailey commented that ‘turnover rents are crazy’, explaining that ‘it’s the beginning of the end if we focus on the wrong metric’. The difficulty is assessing whether the tenant is taking space exclusively for retail sales.
As Bailey points out, retail is no longer just about sales per square foot and that creates a problem. Whether the sale is made through the bricks and mortar shop or on line, ‘it is all sales’. One thing is for sure, as Bailey says, turnover rents are ‘difficult territory’. The interview turned inevitably to Amazon which, as Bailey put it, is killing the retail sale of commodities. Just this week Amazon announced that it is stepping up its onslaught on the UK grocery market by rolling out its Fresh service offering free delivery for Prime members. Our grocery retailers are going to be hard pressed to compete with this.
Amazon’s announcement and a host of retail and town centre related topics were the subject of my podcast interview this week with new High Streets Taskforce Chairman, and self-confessed ‘retail apocalypse denier’, Mark Robinson. Robinson knows a lot about retail and shopping centres having started town centre investor/developer Ellandi, in 2008, in the depths of the global financial crisis. Listen out for the podcast which will be released shortly.
Turning to real estate technology, which has come into its own during the pandemic, this week saw the first Reimagining Real Estate Virtual Summit which ran over three days. This was another cross-Atlantic alliance, this time between New York based CREtech which last year acquired London based FUTURE Proptech founded by Gary Chimwa.
A presentation on reimagining the workspace by Andy Cohen Co-CEO of Gensler was particularly interesting in terms of the return to the office. Their recent survey of 2,300 US workers was illuminating and contains some key statistics on how workers view the office. According to the survey, only 12% of US workers want to work from home full time and 70% want to work in the office the majority of their week. Younger generations are apparently less productive at home. It is clear from the survey and other discussions that to remain relevant the post-COVID office will needs to be firmly focused on connecting people and creating community. I did note that as it is an American presentation, car travel isn’t edited out and there is reference to an app to make your car available when you are ready to leave the office!
Cohen commented that working virtually works while we are all working from home but once some people start going back to the office it won’t be as efficient. Gensler are apparently working on the ‘Fifth Space’ to create an enhanced virtual work environment that through the use of VR and AR will better recreate the collaboration of the workplace virtually. It will enable you to project a hologram of yourself into your office environment!
One of the final sessions of the Reimagining Real Estate Virtual Summit was a short broadcast, again by Fifth Wall’s Brendan Wallace. Referencing BlackRock CEO Larry Fink’s declaration that ‘climate change has become a defining factor in companies’ long-term prospects’ Wallace commented that climate change has now become an international issue. Real estate, he said, is the most culpable industry but somehow escaped the spotlight. But things started to shift two years ago and now there are increasing climate change pressures on real estate companies. Lenders are increasingly mandated to lend on low carbon impact properties and tenants are requiring low carbon properties. Real estate is caught in the middle and somehow has to find a way to become carbon neutral. This, says Wallace, is an exciting opportunity for technology as achieving carbon neutrality will require substantial technical investment. With a number of leading UK real estate companies committing to be carbon neutral by 2030, there is a lot of work to do starting right now.
Susan Freeman is a partner at Mishcon de Reya
Related blogs by Susan Freeman:
- Propertyshe perspectives: our new reality, climate change and the Mipim editor’s dinner
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