Hammerson sells a bunch of retail assets at a massive discount and cuts its dividend. This reflects a massive systemic issue that doesn’t just face landlords, nor indeed retailers. It pervades our economy across the board. A central issue at the heart of the debt crisis was the role of credit agencies. Being the arbiter of risk on behalf of the very businesses they relied upon for their revenues was a blindingly obvious conflict, bound to end in tears. That system and its conflicted relationships remains unchanged.
Exactly the same situation prevails in property. Professional valuations are made by companies wholly dependent on those property owners for their revenues. This is guaranteed to cause fundamental problems, but almost everyone is in denial. In UK retail, over the past 15 years or more we have seen online increase its share of non-food sales from zero to 30%. Over this same period, total physical selling space has actually increased, albeit more from earlier than recently. Meanwhile, online share growth may have slowed but it’s still just over 10% pa.
The key point here is that UK retail capacity growth is far outstripping our very sluggish or virtually non-existent sales growth. This is the central cause of retail distress. Chronic oversupply. The overwhelming majority of retailers have far too many stores, and most are far too big. Oversupply must mean that real estate is worth far less than it was. But this has barely impacted balance sheets.
Inflated values are used to justify bank support and investment cases across the board. The traditional measure of covenant is now totally redundant but still relied upon, with what will be increasingly disastrous consequences. Landlords, banks and investors continue to use outmoded valuation methods and ignore real trading economics and the brand equity of retail businesses. All this is just beginning to catch up with the various players. It’s going to be extremely painful – denial always is.