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Horizon Scanning | UK Real Estate 2019 

Retail Insolvencies

In the 12 months ending Q3 2018, the wholesale and retail trade sector saw the second highest underlying of new company insolvencies in the UK with a number of household names dramatically reducing their real estate footprint or disappearing altogether. Casual dining and fashion have been particularly affected, with the number of CVAs for Q3 2018 rising by 200% compared with the same period in 2017.

Retail insolvencies

A CVA gives a retailer the chance to tackle some of the inherent problems through an out of court, creditor sanctioned restructuring of its unsecured liabilities. However, landlords (who usually count amongst the largest of a retailer’s creditors) can be exposed in a CVA which will normally seek to write down rent arrears for some or all of its stores, reduce the rent going forward or restrict other rights (such as forfeiture or a landlord’s recourse to guarantees). Recent CVAs have even been used to renegotiate unfavourable lease terms or to downsize the retail space in remaining stores. In return, landlords may share in a compromised lease fund or in any future profits. However, any such amounts will be uncertain, payable at some future date and are unlikely adequately to compensate a landlord for the losses it has suffered.

A Landlord may be the only creditor that is compromised in a CVA but other creditor groups not impacted by the CVA still get to vote. Moreover, once a CVA is approved, landlords have relatively limited challenge rights and it may be difficult to gather support for a challenge given that landlord claims are often split into sub-categories (and so not all have the same interests) quite apart from the fact that in many cases, the alternative to a CVA is insolvency.

So, what should landlords do?

  • Watch out: look out for the warning signs of tenant liquidity issues.
  • Understand rights: review and take advice on the terms of their lease.
  • Audit: exercise any audit rights/rights of inspection to get a better picture of the tenant, their surety (in terms of guarantees) and the premises.
  • Talk to agents: instruct managing agents to ensure that any rent deposit accounts are fully topped up and that their terms allow landlords recourse to the sums if needed, as well as making sure the agents flag any performance issues or arrears early.
  • Diversify: may be consider reducing the overall retail floor space or increasing mixed use, as well as look for residential development opportunities.

If the retail industry is to find a way around the death knell sounded for the high street by Mike Ashley before MPs only last week and have any chance of retaining its place at the centre of the hubs around which we all live and work, a radical approach to identifying innovative solutions for the retail sector is needed.

Brexit
Retail Insolvencies
Overseas Investors
New Telecoms Code
Tax Update
Urban Regeneration
PropTech

Brexit 

Ever since the unexpected referendum result in 2016, the nation has been in a curious state of befuddlement and limbo. The process surrounding the UK’s departure from the EU has been enveloped by a dense and numbing political fog, punctuated by seemingly erratic whirlwinds of frenetic activity. Progress as to the terms of our exit - and future relationship - appears simultaneously to stand still, reverse and speed up. But, with approximately three months to go until 29 March 2019, the storm shows no sign of abating yet – if the last few weeks are anything to go by … that said, we can still usefully look at what, if any, progress has been made this year - and what effect this has had on the real estate market.

"The process surrounding the UK’s departure from the EU has been enveloped by a dense and numbing political fog"

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Retail Insolvencies 

In the 12 months ending Q3 2018, the wholesale and retail trade sector saw the second highest underlying of new company insolvencies in the UK with a number of household names dramatically reducing their real estate footprint or disappearing altogether. Casual dining and fashion have been particularly affected, with the number of CVAs for Q3 2018 rising by 200% compared with the same period in 2017.  

"The number of CVAs for Q3 2018 rising by 200% compared with the same period in 2017"

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Overseas Investors 

In recent years, an increasing number of jurisdictions across the globe have either introduced new or strengthened existing rules controlling foreign investment: the UK is no exception and the trend for even greater transparency in UK real estate has continued, especially where overseas investors are involved, driven by the UK Government’s wider push to tackle corruption. Here we look at a number of the key changes which overseas investors in UK real estate need to be aware of; the likely impact of those changes and the reaction from overseas investors so far.

"$13.7 billion of overseas capital piled into the City in 2018 attracted by favourable occupancy rates, dependable investments with yields higher than elsewhere in Europe.” (Cushman & Wakefield: Winning Growth in Cities)

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New Telecoms Code

It is only in recent months that judgments on the new Electronic Communication Code (the “Code”) have started to emerge from the Upper Tribunal (which now decides telecoms disputes). They confirm what many businesses and individuals have sensed over the last year; that what has been referred to by the Tribunal as “the human right to mobile telephony” is likely to trump the human right to enjoyment of one’s own property. The new Code came into force on 28 December 2017 making it much easier for telecoms operators to acquire rights to install and maintain electronic communications equipment on, under or over land. In the absence of reaching agreement with the relevant landowner, an operator has the right to apply to the Upper Tribunal for an “enforced agreement”.

"The human right to mobile telephony is likely to trump the human right to enjoyment of one’s own property"                                                                 

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Tax Update 

What are the UK tax questions that matter most to the real estate sector? How will we be taxed on our income and gains, how much SDLT will we need to pay and what capital allowances are available are invariably near the top of the list. At least for some investors, the answers to all of these will be changing over the next couple of years. Add to this a new 2% digital services tax that will apply regardless of physical presence and there is plenty to think about following the 2018 Budget.

"As previously announced, the taxation of non-UK residents in relation to UK property is to be fundamentally changed"

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Regeneration

Urban regeneration is at a turning point. Even in our present polarised political climate, few would deny that there is a problem with housing capacity and affordability in the UK. Acknowledging the problem is, seemingly, the limit of the consensus. Perhaps one more thing is certain: private developers are inherently a key part of the solution.

"Genuine engagement with residents and other local organisations and institutions early in the development process is crucial"

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Prop Tech

From online estate agents to smart buildings, PropTech is infiltrating the real estate sector in many different ways; in some cases seeking to replace antiquated and inefficient systems and in others introducing new technologies to drive forward an industry that has traditionally been resistant to change. Few Real Estate professionals, whether millennials or baby boomers, would deny that PropTech is changing the Real Estate industry.

"Experts are predicting that technology will play an increasingly prominent role in how occupiers use and operate their Real Estate"

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Explore further topics across our UK Real Estate | Horizon Scanning 2019 publication.

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