Landlords baulk at House of Fraser rent plea

House of Fraser is likely to meet strong resistance to its requests that some of its landlords reduce its rents by as much as 30%.

The store is also looking to reduce its store footprint by 30% in the next 10 years.

Correspondence from chief executive Alex Williamson to landlords, seen by EG, asks for reductions from the start of the retailer’s financial year on 27 January to enable it “to gain some breathing space in order to undertake the much needed restructuring of our brick-and-mortar spaces”.

Williamson says he is “very hopeful” that landlords will “see this ‘partnership’ between ourselves become ever more important in the years ahead and that you are able to work with us to ensure our long-term future together”.

Landlords have expressed concern that if they submit to the proposal it could be followed by a CVA process and they would be penalised twice.

“The way they have gone about this is just naïve,” says the head one of the UK’s largest shopping centre owners. “There are no assurances for what comes next.”

Lack of transparency

There is also consternation that such negotiations do not create a level playing field. While CVAs are detested by landlords as a form of financial blackmail, there is at least a transparent process. This informal process is having shop owners asking why they should be flexible when they have no assurance that their competitors are doing the same and jointly helping towards the sustainability of the business.

Sacrificing income in negotiations may also be anything but a straightforward process for landlords. Almost all landlords have loans secured against their assets, particularly those that are more value-add or opportunistic investors that are likely to own the less prime stores that HoF is most likely to want to leave. These loan agreements are based on particular cashflow schedules and at a time when values are also coming under pressure, putting extra strain on any relationships with lenders is best avoided.

“It’s all well and good giving a reduction of this size but we can’t do this without clearance and a long conversation with the bank,” says one landlord that has received a request.

Billionaire backers

HoF is owned by Chinese conglomerate Sanpower Group and chaired by billionaire Yuan Yafei. Given its financial clout, one of the company’s biggest landlords says it feels that Sanpower should be putting its hand in its pocket rather than tearing up rental agreements.

In some instances HoF is looking for reduced rents in exchange for reducing the size of stores and handing back some space. However, for some landlords this will be considerably more difficult than others, particularly those with cavernous stores with small frontages.

Not all landlords have been as negative though, with some having proactively held discussions with the retailer prior to the letter to address the problem, given its publicised issues.

House of Fraser stores which are split over two floors in shopping centres that include entrances on each level are likely to be those that landlords are most willing to take back. As well as retailers, leisure operators such as cinemas and bowling alleys could be easily slotted into the higher levels.

Where there is the opportunity to neatly cut out a store with a clear frontage, a new revenue stream can be created with a new retailer or in some instances, albeit with considerable capex, some anchor stores could be part converted into hotels or residential. Such redevelopments have become more feasible in recent years from a planning perspective as local councils have become increasingly aware of the need to be flexible in order to retain the economy and vibrancy of their areas.

With HoF’s bargaining strategy having been met in aghast fashion, the process ahead could well be complex, protracted and bitter.