How the ever-changing retail sector is affecting commercial borrowers

Dave Miller - Spicerhaart Corporate Sales
28th November 2018
David Miller Dave Spicerhaart Corporate Sales
"Most of these big name retailers don’t own their prime town and city centre properties, which means landlords all over the UK have been impacted too."

Britain’s high street has suffered this year, with a number of big names entering administration including Toys R Us, Poundland and Carpetright - while others have been forced to slash the size of their store estates.

The growing list of retailers that announced major cutbacks and shop closures since the start of the year include New Look, Homebase, Debenhams, House of Fraser and most recently, Coast.

Most of these big name retailers don’t own their prime town and city centre properties, which means landlords all over the UK have been impacted too.

For some commercial landlords – particularly those with large portfolios - the failure of one retailer may not affect their affordability, as they can offset the cost until a long-term solution is found i.e. a new tenant, sale or a change of use.

But for many others, having an empty retail unit - which they still have to pay business rates on whilst it is generating no income - could result in arrears and ultimately, repossession. So it is important that lenders understand and prepare for the point or potential risk of their commercial borrowers falling into arrears.

The lenders who manage these risks most successfully are those that engage with third parties to assess the commercial borrowers’ financial stability and performance of their portfolio on a frequent basis.

At Spicerhaart Corporate Sales, we offer much more than just repossession and other property related services; we provide a range of services to commercial lenders to assist them in both the evaluation, review and performance monitoring of commercial borrowers who are both performing and also in arrears.

We complete periodic valuations for a number of lenders on a rolling basis – usually every two to three years, but this can be tailored to the lenders' needs – this process gives oversight to the lender by continually assessing how loans and assets are performing whilst giving greater control from a loss provisioning perspective.

By rating properties on a Red, Amber or Green basis, considering all risks and providing a detailed SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis we are able to fully understand the property, the borrowers’ circumstances and the wider risks to both the customer and, most importantly, the lenders’ security.

For example, say the lender has a borrower who is renting a prime retail space to a High Street Bank on a 20-year lease that is due to expire in seven years’ time. But the borrower still has eight years remaining on their mortgage term at this point.

We will undertake our bespoke report and valuation. We can see that while there is no immediate risk, based on the actions of the tenant in other similar sized towns, and the falling footfall in the town centre as a whole, the bank is almost certainly going to review its position prior to the expiry of the lease.

This means we are able to flag within the report the risk to the borrower and also the potential shock in terms of finding another tenant on as favourable terms/strength of covenant.

A common situation is where a commercial borrower has a well-known chain retailer as a tenant and this retailer has renegotiated to pay significantly less rent. The landlord’s hands are tied as he knows it would be difficult to find another tenant, so has agreed to take a significant reduction in income rather than lose the tenant altogether and face the liability of business rates.

And while the landlord may be able to offset this loss in income through other assets now, these will also need to be assessed to ascertain the overall risk the borrower poses now and in the future.

Another example is a care home in a residential area. We do an assessment on the borrower and see that there are risks; the business is a small operator in an ever-growing marketplace, plus there are threats in the form of pressure from central government to reduce fees for care provision and the cost of meeting with ever-changing regulations and compliance.

However, the business trades well, the borrower has a low LTV and the property is in a desirable location with the potential for alternative uses such as an HMO or conversion to a large residential dwelling. So, in this case, the lender will receive a report that provides a full detailed overview of the property and future options if needed.

These case studies show that it is vitally important for commercial lenders to understand their borrowers, not just now, but in the future, so that they can plan around any potential current or future perceived risks.

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