Family Office Real Estate

Don’t write off retail real estate yet – family capital is regenerating it, at least in the US

The coronavirus crisis has become part of a retail apocalypse on both sides of the Atlantic which is undermining family businesses and leading multiples across the retail sector.

It threatens to become the final nail in the coffin for retailers facing spiralling costs, falling demand and online competition. 

The US has proved more adept at using its economic strength and skills in innovation, to make a better job of reinventing retail

According to a survey by Coresight Research, 58% of US citizens will avoid public spaces if, or when, the impact of coronavirus outbreak worsens.  Shops across China have been shuttered, leaving online businesses to take up the strain.

The decline will undermine shopping centres, which are already under pressure. David Simon in the US and John Whittaker in the UK represent families with the greatest exposure to them and both are working overtime to stay ahead.

So far, the US has proved more adept at using its economic strength and skills in innovation, to make a better job of reinventing retail. Stores are shutting but new branches are continuing to open. Well-capitalised family owners can afford to invest, and play a long game as large store chains like Macy’s and Sear’s suffer, partly due to stale managements stocking “me too” products.

US job losses over three years in the sector have more than doubled as closures have continued. A lack of planning constraints has led to an oversupply of shopping malls which offer 23.5 square feet of retail space per head, against 4.6 in the UK, according to the Centre for Retail Research.  Up to a quarter of US malls will close down, according to Credit Suisse. Many malls are already abandoned.

David Simon, chief executive of Simon Property Group, the largest owner of US shopping centres, has expressed concern over tenant bankruptcies.

To protect its position, SPG has agreed to pay $3.6 billion for the shopping centres owned by the Taubman family to increase its grip on the top malls in the US. Simon has joined a consortium buying Forever21, a lively Taubman tenant, backed by Do Wan Chang of Korea, which filed for bankruptcy in September. 

Lease structures in the US are relatively short, meaning the interests of landlords and tenants are closely entwined. This means further deals between tenants and owners of real estate are likely. 

This can involve a restructuring of rent obligations which landlords, including Simon, recently agreed with Bebe Stores. Modell’s Sporting Goods, a multi-generation family business, is optimistic of closing a deal with its landlords. 

Entertainment is also part of the future. The Ghermezian family spent $3 billion developing American Dream Meadowlands, complete with water slides and ski runs last year, first conceived twenty years ago.

The consensus view is that ease of convenience has become essential in the US. According to Daniel Kline, an analyst at The Motley Fool: “Consumers expect an omnichannel model. They may browse at a story and order for online delivery. They may order online and pick up at the store. Some shoppers will mix and match on the same trip.” 

A strong online offering and delivery service should reinforce businesses during the coronavirus emergency. Value for money is another big theme.

Wal-Mart, led by the Walton family, have been successful in creating a hybrid model. Amazon, led by Jeff Bezos, has bought physical stores and wants customers to swipe for goods on the way out – an experience popular in China.  Target and Best Buy, still influenced by the views of their founders, are also competing by offering value and convenience.

The Ortega family controls Inditex, and its core brand Zara uses tech-driven distribution skills to supply fast fashion, at a reasonable price, to consumers.  Inditex is a global rather than a US brand, but the family are highly incentivised. Its founder Amancio Ortega is reportedly worth $71 billion. 

The Malkin family once owned the Empire State Building. Scott Malkin, from a new generation, uses the internet to attract global visitors to discount malls dressed up as designer outlets. SPG is a 15% shareholder.

The situation in the UK is more difficult, not least because of a perceived lack of innovation by large store chains like John Lewis, Debenhams and Marks & Spencer, which have lost track of their family roots.

High costs are making it hard for them to compete with online businesses. An average of 43 retailers have failed in each of the last three years and the Centre for Retail Research warns UK town centres may no longer have a viable future. 

Costume supplier Angels Fancy Dress is a family business, established in 1840. Last month, it confirmed it would close its West End store and go online. It cites costs, but also warns that drug addiction and vandalism have become an issue.

Shopping centre values are being hammered. In the past UK retailers willingly signed up to 25-year leases, subject to upward only rent reviews, based on letting comparisons rather than trading. Rents were a first charge on turnover. Valuations were commissioned by landlords and skewed accordingly. 

In the good years, this provided property companies with security to take on debt, which consoled the banks, but led to booms and slumps. 

It is no coincidence that UK family offices have tended to invest in real estate rather than retail businesses. Property owners are more interesting in collecting their rents rather than checking on the commercial health of their tenants. The UK has very few talented retailers interested in taking on the property establishment, with the exception of Mike Ashley of Sports Direct.

Now that retailers are finding it hard to pay their way, however, landlords are being faced with a harsh reality. 

Tenants have become reluctant to renew leases and keen to execute break clauses. When hard pressed, they enter into creditor voluntary assignments to avoid rents. The surveying profession plans valuations less skewed to landlords. But none of this saves retailers from council taxes, which international online firms can escape.

Morale is awful with rents down 25% in a year. Shopping centre transactions are close to hitting an all-time low. Mike Prew, managing director, of Jeffries, says: “Simply put, there is no market in shopping centres.” Values are down 20% with further falls of 15% on the stocks.  

Family offices and very wealthy individuals have shown some interest in reviving town centres like Grosvenor Estate in Liverpool and wealthy asset manager Jonathan Ruffer in Bishop Auckland. 

John Whittaker has played his part in building commercial property and infrastructure through his family business, Peel Group, backed by the Saudi Olayan group. In his time, he has brought the BBC head office to Salford and fought against SPG’s attempt to stop the 2010 merger that created shopping centre giant Intu.

But Whittaker is facing problems, precisely as a result of acquiring 27% of Intu through Peel.  The slump in shopping centre values has led to writedowns of £1.4 billion at Intu and undermined the security for debt of £4.7 billion. Intu is trying to raise £1.3 billion in equity finance to refinance its balance sheet, but it’s a tall order. Its shares have slid from 194p to 11p in a year. 

Late last year, according to Savills, UK prime shopping centres offered 7.25%. Town centres returned 9%. Secondary shops gave 11.25%.  And tertiary offered 14.5%. 

Yields like these look tempting, in theory. But they imply that more tenants will get into trouble, as buyers stay out of sight. 

With 171,000 retail jobs set to be lost in the UK this year, and 143,100 in 2019, according to the Centre for Retail Research, the situation could yet amount to a national emergency for the UK. Add in the worst effects of coronavirus and it could become even more serious.

We shall see. 

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