Comment

Ministers will lift lockdown but it’s of little cheer to retail

Britain entered the pandemic with too much retail property, and will exit with much too much

At last, a pandemic promise is kept. Up to a point, at least. The second lockdown will be lifted as scheduled on Dec 2.

In a year in which good news is extremely thin on the ground and pledges from ministers are mostly worthless, this qualifies as a cause for socially distanced celebration.

True, parts of the country will face new, turbo Tier 3 restrictions that are likely to feel very much like a rebranded lockdown. Working from home will probably still be recommended. But where coronavirus is in retreat, non-essential shops will be allowed to reopen for the critical weeks before Christmas.

Although demand will be nowhere near normal, for many retailers it will come as a huge relief. For others it will already be too late. Some normally make the majority of their sales in the last few weeks of the year and are more exposed to the impact of depressed high streets at this time of year. Greetings cards shops, for instance, are in a desperate spot.

Commercial landlords know that regardless of the coming easing of restrictions on normal life, they are on track to lose many more tenants before a vaccine rides to the rescue. The proportion of empty shops nationwide climbed to 13.2pc by the end of the third quarter, from 12.4pc three months earlier. Britain entered the pandemic with too much retail property, and will exit with much too much.

No doubt there is some pent-up demand throughout the system.

Growing retailers have put their expansion plans on hold while the uncertainties of the pandemic are resolved. Meanwhile the return to “normal” life, when it happens, has every chance of being an ecstatic period of spending.

Hordes of consumers will doubtless open wallets that are stuffed with lockdown savings and enjoy themselves as the suffocations of the previous year are forgotten in a binge of restaurants, concerts and parties. For many, high street spending sprees will be a part of the fun, too. But as such visions of post-pandemic business become more realistic, nobody should kid themselves that all that has been lost or altered will be recovered.

Not retail landlords, certainly. Their business was declining before coronavirus arrived, as those who offloaded shopping centres to reckless councils were fully aware.

Changing consumer habits were eroding the value of retail property before and are now demolishing it, figures from the Office of National Statistics show.

Before 2020 online retail had grown incrementally for two decades, gradually accounting for a bigger share of non-grocery shopping. At the beginning of the year it was about a fifth of the total. By October it had doubled to roughly 40pc. This is a revolution on a scale that cannot be entirely undone.

Some big retail tenants are taking advantage of the landlords’ weakness. Boots has come under fire from the property sector for using the pandemic and moratorium on evictions to force rent renegotiations.

It is opportunistic, but sympathy is in short supply. “Upward only” leases, common contracts which conjure an imaginary world in which the value of property can only rise, are the prime example of commercial landlord complacency. Their consequence is the blizzard of Company Voluntary Arrangements we now see. Tenants are too often forced to turn to these court insolvency proceedings to enter a negotiation for lower rent.

The question now facing the commercial property sector is whether something similar might now play out in the office market. Big employers including Deloitte, Schroders, JP Morgan and Standard Chartered are declining to force the flexible working genie back into the bottle. Just as there are more empty shops, the availability of office space is rising.

There is currently an unwillingness in the property sector to accept that this means a decline in the value of office buildings.

It is too early to say what share of home workers will cling to their new lifestyle and therefore whether landlords and valuers are right to reject suggestions their rent is too high However, if they are wrong, the sector risks a repeat of its poor handling of structural shifts in the retail market.

Shopping centre owners once bloviated that the death of department stores could be managed with clever use of space for coffee shops and nail bars. In reality, Intu went bust instead.

This time around, at least questions are rightly being asked about the independence of the valuers who set the benchmarks by which commercial property investment trusts use to attract capital.

Much of this boils down to what is likely to be one of the overarching big stories of 2021: the question of where in the economy the financial cost of coronavirus is carried and its knock-on effects.

The extraordinary measures taken by the Treasury, involving nearly £500bn in gilts sales and imperfect as they are, have ensured that most individuals and businesses have stayed afloat. But an overall GDP plunge of about 10pc cannot be furloughed.

The unstoppable forces faced by high street retailers, and the threat to the office space market from new ways of working, mean commercial property must be one of the sectors to suffer most. The pain will be passed on, to the banks, international investors and pension funds behind it.

There is a chance that in time this will be no bad thing. An economy less dependent on property, where the hunt for returns diverts capital to more innovative businesses would be welcome. Some of those empty shops and offices might make decent homes, too.