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The flexible future of retail

The flexible future of retail

JD Sports has had a great year.  All of its key performance indicators are soaring ahead. 

There are many factors contributing to their success.  One interesting element is that JD Sports is, in many respects, a traditional bricks and mortar retailer (it has 390 stores across the UK and Ireland).  It unashamedly puts its physical stores at the centre of its strategy.  With bricks and mortar being blamed for so many retail casualties in recent times, and in many cases being the clear focus for CVA proposals – how can it be that JD Sports can have the audacity to succeed while relying on an actual network of shops?

In a recent interview, their CFO talked about the benefits of stores which are a showcase for products and provide retail theatre.  When speaking about property specifically, he pointed to flexible leasing terms as one core advantage that they are constantly working to secure.

What is flexible leasing?  It comes in many guises and can affect a broad range of leasing terms.  At its heart, however, is the ability to exit an underperforming location in relatively short order.  That means tenants having regular break options.

A tenant’s desire for flexibility in this way is in direct conflict with a landlord’s desire to have long term secure rental income.  Such income can, amongst other things, drive the investment value of a landlord’s property.

Anecdotally, a number of the big fashion retailers are seeking other concessions in the name of flexible leasing.  Next’s requirement that they receive a rent adjustment similar to that achieved by any neighbouring tenant under a CVA has become well-known. But other heavyweights are seeking ever more sophisticated arrangements that could see their rent linked to turnover or occupancy costs, rather than the traditional “market rent”.  The argument being, that where each tenant cuts its own deal to suit its own trading reality (and that can include a deal reached via a CVA), there ceases to be a true general market rent.

All of this has a serious impact on landlords.  The way in which retail property can be valued is under reassessment and significant revaluations of retail assets are already underway. 

For all of those active in the retail sector, it becomes increasingly difficult to keep up with this ever-shifting set of trends.  Whether a landlord or a tenant, there is therefore a growing need to be better informed and better protected than ever when engaging in property deals.  That means having the best professional team to hand.

While it is the giants of retail seeking to impose their will on battle-fatigued landlords, there are potential benefits for the wider retail sector.  Greater flexibility in leases could encourage more independent, artisan and experimental retailers on to the high street.  That could help usher forward some of the changes to the retail mix that are much needed.

Landlords should also see the positives.  While flexible leasing could result in an increased turnover of tenants, a reduction in the risk associated with taking on lease commitments could also see many vacant units brought back to useful life.  With the correct mix of established and independent retailers (and a variety of uses), a landlord’s portfolio of retail property could be transformed.

The end result could be a fresh settlement as between the current established positions of landlords and tenants.  If landlords and tenants can work together in a spirit of co-operation, that might see some true flexibility shining through, with the results achieved seeing benefits for both parties.

By Graeme Bradshaw
Partner, Property

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