As shopping centre owner Intu warns it could be forced to shut many of its sites if it can’t resolve its financial issues by tomorrow, 26/06/2020, our real estate and corporate restructuring and advisory experts take another look at what could happen next.
On top of the multiple challenges hitting retail and leisure landlords and occupiers arising from COVID-19, the news that Intu has had to write down the value of its shopping centre portfolio by nearly £2 billion came as further bad news.
Intu owns multiple high-profile retail and leisure locations across the UK (including The Trafford Centre in Manchester and the Lakeside complex in Essex) and on 12 March was widely reported as being at risk of insolvency. As reported in the press, recent attempts by Intu to raise additional funding have failed and, like many of its occupiers, the firm has been substantially affected by the multiple challenges facing the retail and leisure sectors. We regularly hear of the challenges facing retail businesses and these issues equally affect investors with retail assets.
If the worst happens and Intu does fall into a form of insolvency process, clearly two key concerns will come into play in terms of the assets which it holds: maintaining the value and quality of its centres; and ensuring that any concerns of occupiers (and potential occupiers) are addressed.
One would hope that, given the quality of the locations which it owns, buyers could be found for business and assets (albeit this may consist of a break-up of the portfolio). In the short term, any insolvency practitioner appointed would probably seek to keep the business running and identify opportunities for an accelerated disposal (to maximise value for creditors). Should Intu collapse, it is vital that the insolvency practitioners continue to operate its centres in a way which attracts footfall and retains tenants. Retail landlords are operating in an increasingly competitive market in light of the reduced number of operators taking new space. Intu must prevent any flight from its centres by its retail and leisure occupiers – if this begins to happen, the concern will be that this will snowball and leave centres with significant voids, an inability to attract new tenants and values which are degraded even further. Whatever happens, the key must be to maintain stability and ensure that its centres remain places where customers want to go and from which retail and leisure occupiers, accordingly, want to trade.
What can retailers and leisure operators do?
In the meantime, retailers and leisure operators are asking very practical questions as to what will happen on the ground as they try to continue running their stores, restaurants and other locations. Shopping centres are interesting assets in that their insurance and the services provided to them are effectively funded by the occupiers themselves. Service charge monies should be held separately from the landlord’s own funds, so there should be a flow through of service charge monies to meet the ongoing costs for the day-to-day operation and running of the centre. Prior to the Covid 19 pandemic, in the absence of substantial voids, there should have been sufficient funds (provided by the tenants themselves) to ensure that day-to-day operation can continue almost as normal. However, since the March 2020 quarter date, many tenants have not only not paid their rent but have also withheld their service charge to keep cash in their businesses which were effectively closed overnight. There is therefore a concern about whether financially it is feasible for the shopping centres to remain open if funds are not available to meet the day to day running costs. If administrators are appointed, they may appeal to the tenants to request the service charge costs be paid to allow the centres to remain open.
To the extent that Intu is involved in any discretionary spend at a centre and/or capital investment, this is almost certainly going to cease until the future of Intu and its shopping centres is resolved. Perhaps the biggest concern is for the development sites, such as Broadmarsh in Nottingham. Selling those may be more difficult and works may stall if contractors are not being paid.
Statutory moratoriums, in an insolvency situation, will just add complexities to things like the issue of lease renewal proceedings. These obstacles can be overcome but need to carefully considered to ensure that all parties are protected. In addition, current renewals and conversations around regears, breaks and rent reviews are likely to slow down as an insolvency practitioner will probably want the new buyer to conclude them. If an administrator is appointed it will be keen to deal with the issue of rent arrears but with the current moratoriums in force, this may be easier said than done.
If Intu enters insolvency, this would be yet a further blow to the retail and leisure sector and add further uncertainty when the sector is already dealing with unprecedented challenges.
NB: This is an update to our original article which was published 13 March 2020.