Challenges for UK retail landscape in 2012

More lender choice on BTL at 80% LTV

BPF critical of government ‘u-turn’ on pre-packs

Property investor appetite “extremely strong”

Landlords are not being greedy in Scotland

The government’s U-turn on ‘pre-packs’ has come at a time when landlords and other creditors look for means by which to challenge retailers who are using the pre-pack as a means of reducing rents and to shed debt.

“JD Sports’ purchase of Blacks is one such deal which is testing the patience of landlords” says Jonathan Webb from DTZ’s Retail team. “They are a solvent, acquisitive company whom many (including Sports Direct) believe to have picked up Blacks ‘on the cheap.”

Webb continued: “Overall, the number of high profile casualties both before and after Christmas has not been a surprise. It is now time for commercial property landlords to pick up the pieces and examine the prospects for newly vacant units. They will not be buoyed by the Local Data Company’s latest report which revealed that over 100 former Woolworths units remain vacant (13%) three years on from closure – with an increasing percentage being demolished in the last year. Retail obsolescence is gathering pace as prime pitches shrink and location becomes an increasingly important factor for both consumers and retailers.

“Despite this, there are reasons to be positive. The last few weeks have seen the likes of John Lewis, Debenhams, and Poundland all publish strong like-for-like sales growth. The first two are established anchor tenants, but it is the latter which has taken a large amount of space in recent years, picking up large former Woolworths and TJ Hughes stores to become a value anchor in its own right.

“Fashion brands such as Aurora’s Warehouse and Oasis, as well as Ted Baker and Burberry have also increased sales, demonstrating how the higher end fashion market remains relatively unaffected by the rise of internet retailing. Others, such as House of Fraser, have actively embraced multichannel technology, opening new smaller format stores as part of a ‘bricks and clicks’ strategy.

“Furthermore, supermarkets continue to be acquisitive with all of the main competitors taking advantage of cheap land prices in a depressed residential market to build sizeable development pipelines. However, their continued growth may sound the death knell for several well known ‘at risk’ retailers as CDs, books and cheap clothes all become part of the weekly ‘trolley dash’ rather than a less convenient stroll to the High Street.

According to Webb, 2012 looks set to be the year in which retail obsolescence increases in pace.

More lender choice on BTL at 80% LTV

There are now six mortgage lenders offering more than 20 buy to let mortgage products with LTVs at 80%.

From December 2008 to May 2010 the highest achievable LTV for a buy to let mortgage was just 75% however today there are six lenders offering 80% LTV or above: Kent Reliance Banking Services, Saffron Building Society, Leeds Building Society, Aldermore Mortgages and most recently, Clydesdale Bank.

David Whittaker, managing director at Mortgages for Business, said: “This is great news for landlords and investors and demonstrates the growing confidence of lenders in this sector who see buy to let as more profitable than homeowner lending.

“Between them, there is a good range of products on offer from two year discounted trackers to five year fixed rates. Some even come with flat arrangement fees which really start to make sense for investors looking to borrow larger sums.”

BPF critical of government ‘u-turn’ on pre-packs

The British Property Federation (BPF) has criticised the government for scrapping proposed new legislation that would have tightened the rules on so-called pre-pack administrations. 

In response to the u-turn, the BPF has called for immediate action to increase protection for the creditors of businesses which use pre-packs, which have been subject to abuse and have left creditors out of pocket.

The rejected package of reforms, first mooted 18 months ago by Business Innovation and Skills minister Ed Davey, required insolvency practitioners to notify creditors in advance of a pre-pack and allow them three days to scrutinize the proposals to ensure they represent the best deal for creditors, and to give them time to object. 

The BPF had argued that three days would be insufficient and called on ministers to extend this notice period, but instead it has been scrapped completely as Ed Davey announced recently that the reform would not go ahead due to an long-standing Government moratorium on new regulations affecting ‘micro-businesses’, despite the fact that this would have been obvious when consultation started 18 months ago.

A so-called ‘pre-pack’ is a fast-track administration that avoids a failing business being sold on the open market. An insolvency practitioner instead lines up an advance purchaser to take over the profitable parts of the business, with the company going into administration simultaneously. Most recently Bonmarche, Peacocks and Blacks Leisure were snapped up in this manner.

Pre-pack sales to connected parties – so-called ‘Phoenix Pre-packs’ – are often done at great speed and presented to creditors as a fait accompli, leaving them particularly open to abuse. 

Ian Fletcher, director of policy at the BPF, said: “The Government has wasted 18 months reaching a conclusion that was obvious at the start of this process; that the policy being pursued would potentially breach the moratorium on regulations affecting micro-business.

“This decision leaves creditors as exposed to sharp practice as when this debate started 18 months ago. Whether by legislative or non-legislative means creditors now expect the Government to move swiftly to provide increased protection. The Government recognises there is an issue to be resolved, and having wasted so much time anything less than swift action would be deeply unsatisfactory.”

Property investor appetite “extremely strong”

The latest Young Index report of Private Rented Sector (PRS) sentiment shows that 19.1% of landlords added additional residential property assets to their portfolios during 2011.

The activity was driven by strong positive expectations for both capital growth and income returns for the year ahead.

London clearly leads the way with 85.1% of respondents expecting rents in the capital to continue to rise throughout 2012 and a full 100% of landlords predict that property values in London will be at current levels or higher by the end of the year.

Interest rates are widely expected to remain low.  58.3% of landlords expect the Bank of England base rate to remain static throughout 2012.  Of those who do see a rise on the horizon, their average prediction for Q4 2012 is less than half a percentage point higher than the current all time low of 0.5%, at 0.78%.

Undoubtedly, current low costs of finance represent a short term fillip but landlords clearly see the Private Rented Sector as a long term investment class.  Data from Young Index Q4 2011 show that 36.9% of landlords intend to hold their property until 2031.  The average future hold period across all respondents was 15.4 years.

Neil Young, CEO of Private Rented Sector specialists, Young Group, who carry out the quarterly research said: “Without a doubt, the appetite from private investors in the PRS for additional investments is extremely strong.  The London rental market is particularly strong and demand from tenants seeking quality PRS accommodation shows no sign of abating, buoyed by a population that is spending longer than ever living in rented homes and increasingly living in solo households.”

The Young Index contained the following data:

Long Term Focus
97.8% of all landlords intend to hold their property for the next 12 months.

58.7% intend to hold their property assets for the next 10 years or more.

36.9% intend to hold their property assets for the next 20 years or more.

15.4 years is the average future hold period that residential landlords expect to retain their property assets for.

Appetite for Investment
41.9% of investors are considering purchasing additional residential property assets within London over the next 12 months.

16.2% of investors are looking at opportunities in the UK outside of the capital.

Capital Growth and Income
A full 100% of respondents believe that London property values will be at current levels or higher by Q4 2012.

For UK property outside of the capital, only 30.4% expect values to be at current levels or higher by this time next year.

85.1% of respondents expect rents in London to rise over the coming year.

79.5% of landlords expect UK rents outside London to rise over the coming year.

Landlords expect capital values in London to see an average increase of 4.7% during 2012 with rental income increasing by an average of 2.4%.

The predicted 12 month outlook for PRS capital values outside of London UK is a drop of 1.3% but rental income is expected to increase by an average of 1.2%.

Landlords are not being greedy in Scotland

Citylets’ latest figures for the rental market in Scotland show that in Q4 2011 two bed flats accounted for 41% of all rentals, while a further 29% involve one bedroom flats. Houses now account for just 20% of all rental transactions but this figure was 13% at the time of the first report from Citylets back in Q1 2007.

The average monthly rent in Scotland now stands at £656, a rise of 1.9 % on Q4 2010. Meanwhile, the average time to let (TTL) figures rose slightly from 35 days in Q4 2010 to 39 days in Q4 2011.

Scotland-wide, the average rent for a two-bedroom flat rose 1.5% from £617 to £626 between the final quarter of 2010 and the same period in 2011. For one bedroom flats, the average rent rose 3.6% year on year, from £473 to £490.

Aberdeen and Edinburgh continued to perform well with rents rising across most property sizes.

Aberdeen remained the most expensive part of the country for rentals, with the average rent for a two bed flat standing at £830 (up 2.1% on Q3 2010), with an average TTL of just 21 days. For one-bedroom properties in the Granite City, rents rose 0.5%to £578, while demand is so great the average TTL is just 18 days.

In Edinburgh, for the period covered, two-bedroom properties attracted an average rent of £711, a year-on-year rise of 1%, while properties took an average 29 days to let. Meanwhile one bed rents reached £555 on average, up 4.1% on the 2010 figure, while average TTL was just 25 days.

In Glasgow properties took slightly longer to rent, with the average TTL for two bed properties increasing from 31 days in Q4 2010 to 39 days in Q4 2011. Average rent for those two-bed homes rosefrom £607 to £611, achange of 0.7%. Scotland’s biggest city saw significant growth in average monthly rents for one bed properties, which hit an average £465, up 4.7% on the Q4 2010 figure, while the average TTL was 36 days.

The Q4 2011 report also includes analysis on the rental market in Dundee. According to the Citylets data, two-bedroom properties attracted an average rent of £542 per month in the final quarter of 2011, while the average TTL was40 days. For one bedroom properties, the average rent in the quarter was £381, a drop of 2.6%, while the average TTL fell from 36 days to 32 days.

After 20 consecutive quarterly publications, the latest Citylets Report – for the last 3 months of 2011 - caps five full years of analysis and reveals a thriving market where the volume of quality properties to let is higher than ever, rents are easing upwards, yet landlords are resisting any urge to squeeze tenants.

Dan Cookson, senior analyst with Citylets, said: “For us this 20 th report is an important milestone, so it is pleasing to see that the private rented sector (PRS) in Scotland has expanded dramatically over the last five years and our reports are of growing relevance.

“Generally landlords are enjoying steady increase in rents, while properties are generally empty for less time. The good news for tenants is that rent rises are well below inflation. Landlords are not being greedy. It’s a competitive market and most of them are in it for the long-term and realise that short term rent hikes are likely to lead to longer void periods.”