How the High Street is shifting and what commercial lenders can do to mitigate risks

Dave Miller - Spicerhaart Corporate Sales
31st January 2019
David Miller Dave Spicerhaart Corporate Sales
"Large department stores, clothing stores, restaurants and other businesses that historically have done really well on the High Street are struggling"

There has been a huge shift in the High Street over the past few years.

The start of 2018 saw a whole raft of well-known, well-established High Street names face financial difficulties thanks to a slowdown in consumer spending and growing competition from out of town retail parks and online shopping.

But when people stop spending on our high streets, it has a bigger impact than we might think. It is not just the retail brands themselves that are affected; it also has an impact on the landlords of those retail units and their lenders.

For example, years ago, a landlord whose tenant was House of Fraser, Marks & Spencer, or a High Street bank would be seen as a strong covenant. Where the landlord had purchased the investment through a mortgage, their lender would see a performing loan with limited risk as it was a strong covenant.

But since the retail woes of the past 18 months, things have shifted significantly and the risk to these types of retailer are now much higher. Large department stores, clothing stores, restaurants and other businesses that historically have done really well on the High Street are struggling, with stores and branches closing across the UK.

In their place, we are seeing the likes of Poundland and other cheaper retail chains taking over, alongside e-cigarette stores, charity shops and bookmakers, where sometimes the same brand may have two offices on the same high street.

With this shift and the EU requirement for a supervisory slotting criteria approach for specialised lending exposures, we are increasingly being approached by lenders looking to utilise our services to assess the ever growing category of “high volatility commercial real estate”.

We work with commercial lenders to review, on a periodic basis, how their commercial assets are performing and their current values.

We also look at both current and future risks, threats, and most importantly opportunities. The completed valuation report is comprehensive and gives the lender a detailed overview of the asset and any potential risks from both a value and operational perspective. This allows them the opportunity to assess the asset and apply the appropriate risk weighting. Often the loans are performing well, but increasingly, we are finding there are risks to those lenders where a proportion of their commercial loans are secured on retail premises.

Our service helps lenders to assess their security and allows them to plan and provision for any risks or changes in the value of the security. Having a clear, concise and detailed report on the property ensures that a lender can understand each of their assets and make adequate provisions where appropriate.

If the assets we review are performing, we will look at what the best option would be should the circumstances change and the lender needed to recover their outstanding debt. We can suggest exit options to the lender – including sale, redevelopment, or change of use as a way to maximise the value of the security.

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