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23 May 2018 | By Ed Meier

UK retailers’ real estate headache

Ed Meier, manager of the Old Mutual UK Equity Income Fund, comments on UK retailers.

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The internet is quickly changing the shape of the high street, as the recent footfall data from the British Retail Consortium and the announced store closures from Marks and Spencer have shown. Some retailers saw the writing on the wall and have embraced the online shopping trend, whilst others have been too blasé in the face of this structural shift. 

A common theme amongst recent failures in the sector has been inflexible leasehold structures, which have become a significant burden to some retailers. Leases which are reasonably short can be rotated to better locations, but those that are lengthier risk leading to stores being stuck in the wrong place. At the end of the day, a retailer’s rent roll is another fixed cost which has to be managed and it’s a fixed cost that Amazon doesn’t have. 

Structural pressure can also work for them though – Next, for instance, has said its rents are falling nearly 30% when they renew leaseholds, which does wonders for a profit margin under pressure.

However, if a company has made poor choices in the past, then the only route out is often via a restructuring called a company voluntary arrangement (CVA) – see Mothercare, Carpetright, House of Fraser and so on.

The stock market has painted most retailers with the same brush, so we have been able to capitalise on the cheap valuations and invest in companies that have a flexible real estate portfolio, such as Next and Dunelm.

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