Changing tenant covenant perceptions and flexibility in the lease model in UK city centres

ABSTRACT

The retailing industry in the UK is experiencing unprecedented structural change. The impact on retailers has often dominated headlines, along with the impacts on local services and economies, but with little attention given to the implications for property owners and practitioners. Exploring and understanding the responsiveness of landlords, and their behaviours, is essential to understanding the adaptiveness of a retailing system. This study employs semi-structured interviews to examine the short- and long-term changes in the retail market and the actions of landlords in response. The findings span the period prior to and during the first year of the Covid-19 pandemic in 2020, and reveal that fundamental changes have occurred to establish tenant covenant norms and the traditional retail leasing model. The paper explores these changes, including a shift in tenant risk, reposition of the leasing model in favour of tenants, generally, and greater application of turnover rents. The pressing challenge for current valuation practitioners, therefore, is to incorporate these fundamental changes within the market into the pricing of retail assets. Significant progress in this area to date, as explored in the paper, has been limited although greater application of discounted cashflow techniques is set to be encouraged by the RICS.