The property industry has condemned the conduct of retail chain House of Fraser as it prepares to launch a CVA next month.
The department store has been accused of failing to follow best practice by not holding discussions with landlords before going public with their intentions, not “being prepared to absorb the pain from its failing stores” and “creating an unfair playing field for other retailers”.
Ian Fletcher, director of real estate policy at the British Property Federation, said: “The understanding landlords have shown on a couple of previous CVAs we think will be absent, because of the way this has been handled.”
Pending creditor approval, House of Fraser’s store restructuring is expected to conclude in early 2019.
House of Fraser, which did not disclose the number of shops earmarked for closure in its CVA, operates 59 stores across the UK and Ireland. It has more than 6,000 staff and 11,500 concession employees.
The CVA is part of a conditional agreement between Chinese parent company Nanjing Cenbest, a subsidiary of Sanpower, and Hamleys owner C Banner. Under the deal, C Banner will acquire a 51% stake in House of Fraser Group.
The transaction, subject to bondholder and shareholder approvals, is expected to close by the end of June this year.
House of Fraser critics speak out
Ian Fletcher, director of real estate policy at the BPF: “Over the past few months landlords have supported several CVA proposals, where discussions have taken place before the restructuring business has gone public.
“This allows for a constructive dialogue, but House of Fraser has not followed this best practice. The understanding landlords have shown on a couple of previous CVAs we think will therefore be absent, because of the way this has been handled.
“Announcing the CVA via a statement on new investment, while helpful to the overall continuation of the business, is highly insensitive when you are asking property investors to absorb large losses. We think any discussions on this CVA will therefore be awkward and any support for the CVA given grudgingly.”
Mark Williams, president of Revo: “Revo clearly supports measures that help retail businesses and safeguard jobs across the sector. However, while the CVA process was well-intentioned, its application is being increasingly used by companies in order to extract themselves from property contracts they willingly entered into.
“The result is that property investors, often the very pension funds of many of the shop employees, lose out, while the owners of the business take no direct pain. Further, it creates an unfair playing field for those retailers who have traded successfully and stick with their contracts.
“All of this masks two important factors. The first is that property tax is now the largest cost ahead of rent for many occupiers, and the second is that internet retailers do not contribute to the tax, yet take many of the benefits. [It is] property tax that pays for the roads and bins of internet deliveries, yet those companies are not paying for it.
“For town and city centres to thrive, the government needs to take urgent action on rates, look at how it treats online retailers and examine the fairness and use of CVAs.”
Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs: “[House of Fraser] needed to reduce costs across the business and a CVA is an increasingly popular mechanism for retailers to do so. I think store closures in this instance are more important to House of Fraser than rent reductions, however […] rent as a percentage of total costs is minimal – rent-to-sales ratios for department stores generally average at around 4%.
“I think the CVA will gain a majority vote, as House of Fraser is an anchor store and major footfall driver, and its presence drives the turnover of retailers trading nearby – and therefore rental growth for landlords.
“Like many retailers it is likely that House of Fraser will retain stores in dominant, high-footfall locations such as city centres and large out-of-town malls. It is smaller, regional centres that are likely to bear the brunt of the mooted store closures.”
Charlotte Pearce, retail analyst at GlobalData: ‘‘Another week, another retail CVA announcement. This time it’s House of Fraser’s turn, and while CVAs are often only delaying the inevitable, this one does at least come with the promise of a cash injection to invest in the remaining stores, which have been starved of investment in recent years.
‘‘Unlike recent CVAs from New Look, Toys ‘R’ Us and Mothercare, which have in part stemmed from unnecessarily large store portfolios, House of Fraser has just 59 stores across the UK and Ireland.
“A number of its legacy stores are in second- or third-tier locations and with falling footfall on local high streets as well as little investment to make stores a destination for shoppers, House of Fraser is suffering more than other UK department stores.”
