London retail property

By the time this article is published, the non-essential shops will have reopened, and the tills are ringing. Although with so much information available from a multitude of sources predicting the retail outlook for 2021, where do we even start to second-guess the future? This scribe has tried to condense myriad reports focused on the effects of the pandemic upon the retail leasing market in London and considered the various landlords’ responses to the unprecedented effects of Covid-19.

It could be argued that the retail sector was already experiencing some structural changes and that the existing pre-conditions possibly exaggerated the effects of the various lockdowns and disruptions caused by the closure of non-essential shops, working from home practices and the severe restrictions on international travel into the capital and the UK generally.

The global pandemic is, of course, uncharted territory and beyond any doubt, 2020 was one of the most challenging years for the retail sector perhaps since World War II. Many of the published research documents do, however, reach consistent observations and conclusions:

UK consumers are likely to ‘revenge spend’ in 2021 when the shops reopen.

‘Retail therapy’ is a contradiction to low consumer confidence and anticipated low spending. This is a lesson from history and previous recessions. The consumer still appears willing to spend when the high street is not subject to enforced closure.

GfK’s (one of the largest market research institutes in
the world) Consumer Confidence Index registers that during the Global Financial Crisis and early 1990s recession, the index was broadly the same as 2020. For context, the previous worst month on record was May 2009. The furlough scheme has created a protective bubble to unemployment levels. That said, in times of hardship, consumer spending and retail sales have usually outperformed the wider economy.

The success of the vaccine programme and the introduction of a Covid-19 ‘passport’ should be the pathway to international travel.

Central London retail has had the greatest shock and the fallout is likely to continue into 2021 until ‘safe’ travel on the underground network is accepted by residents of the capital and the international travellers return. The good news is that many countries are now investigating the feasibility of digital passport certificates. At the time of writing, just over 30 million people in Britain have received their first vaccine. The restrictions on the movement of the population and the mass vaccine rollout are likely to result in relatively less disruption in the summer.

The Recovery

Predictions vary, but KPMG, for example, does not expect a significant recovery until the end of 2021 into early 2022. The Centre for Retail Research estimates that retail sales will be below 2019 levels in 2021 but should recover by 2022. Brexit could still present a challenge, particularly to supply routes.

Many people do have more disposable income, but with unemployment likely to increase, the future remains uncertain. The key drivers of consumption include value, convenience, experiences, choice, purpose and the safety of online data (privacy).

Commercial rates payable

The rebalancing of the nation’s financial position will dominate the economic landscape into 2021. Property taxes currently account for around 10 per cent of all UK tax revenue.

The business rates holiday is due to expire at the end of June 2021 followed by a period of one-third rates payable until April next year. Historically, business rates account for around 30 to 40 per cent of property overheads.

CVAs will continue

It is estimated that approximately 50 to 60 per cent of retail rent owed is still outstanding into 2021 and that landlords have only collected around 20 per cent of the rent due in March. The expiry of the business rates holiday coincides with the lifting of the moratorium on landlords’ action to collect rent at the end of June. A key date in the diary for the payment of property overheads. Fashion and footwear retailers have been disproportionately impacted by the restrictions with many high profile CVAs and others anticipated. The outlook for shopping centres looks challenging with the demise of landmark department stores and numerous high street brands.

The leasing strategies adopted by landlords

The inevitable product of the pandemic is the oversupply of retail opportunities, relative to demand. Landlord incentives remain vital to entice retailers to commit to new stores and prevent increased vacancy levels.

Flexibility and affordability will define the retail landscape in 2021. ‘Flexibility’ includes lease length and break options. ‘Affordability’ may result in the introduction of turnover rents. However, short leases and unpredictable levels of rental income related to the turnover of an individual brand conflict with the basic principles of retail real estate and investor expectations. Historic mistrust by both landlords and tenants is still a major barrier to the wholescale introduction of turnover rent leases.

The emergence of multi-channel retail will only confuse the definition of ‘turnover’ relating to an individual store.   


At the moment, landlords appear to be adopting one of four, or a cocktail of these leasing strategies.

(1) Maintain pre-Covid-19 levels of rent and incentives.

Only one estate landlord with significant property holdings in Knightsbridge is endeavouring to adopt this strategy. Rent concessions have been strongly resisted during 2020 and the landlord maintained a robust position on the collection of all rent.

(2) Market rent and market rent-free periods.

There has been a reduction of rents on the principal shopping streets in Mayfair. However, as leasing activity is at an unprecedented low level it is difficult to establish or define a ‘market rent’. Rent-free periods are extended beyond one year and reverse premiums are available from brands committed to a lease but seeking to exit.

(3) Turnover rents

Landlords with significant property holdings in the area are prepared to agree to turnover rents only for one or two years but are still seeking to convert this turnover rent into a base rent payable at some stage in the future before the first review, (usually after the first five years of the lease).

(4) Capital contributions

Where a retailer will provide a good, secure covenant and a robust business model, landlords will contribute to the fit-out costs, in part or even in full.

The leasing packages are almost unit and brand-specific. The custodian estate landowners can afford to take a ‘century’ long-term view, although the property companies appear to be much more creative in their approach.

It is inevitable, however, that at some stage the leasing incentives and financial contributions will reduce as these initiatives result in lettings to the more ‘opportunist’ retailers. Whether you decide to ‘lease now to avoid disappointment’ depends upon your own risk-management strategy!    

Keith Wilson, Wilson McHardy

Tel: +44 (0) 207 439 1666