Intu, the FTSE 250 shopping centre landlord, issued a profit warning recently, citing a 4 to 6% drop in profits driven by a higher than expected level of CVAs and a reduction in new lettings. Intu’s share price peaked at 347p per share and is now down to 92p per share.
These struggles serve as a stark reminder of the problems that the retail sector is facing, especially outside London where Intu runs most of its shopping centres.
Greg Connell, a credit expert at Red Flag Alert said: “A profit warning from Intu serves to illustrate the fragility of the wider retail sector.”
Intu invests in shopping centres with an expectation that they are a relatively secure asset class, and that returns in the form of lease payments will grow consistently. If this doesn’t materialise – as with Debenhams for example, where rents are being negotiated down – then returns are affected. Right now, these returns are most definitely not materialising.
The Problems Run Deep for Property Businesses
The RICS Commercial Property Market Survey from 2019 Q1 reports occupier demand in the commercial property sector has decreased by 13%.
The report looks at retail, office and industrial property, but the fall was driven by retail property with demand dropping across the UK and in all types of unit. Respondents expect this decline to continue over the coming 12 months.
Looking specifically at shopping centres, a report by CoStar suggests shopping centre investment has hit a 16-year low, driven by retailers restructuring leases.
The Guardian reported this month that the number of empty shops increased by 7,500 last year, with banks, pubs and estate agents the hardest hit. The Guardian’s neat graphic below shows closures by business type in the 650 top UK shopping locations.
Image courtesy of https://www.theguardian.com/uk and data courtesy of the Retail and Leisure Market Analysis 2018.
We’ve already reported on the significant financial distress facing UK businesses. Our Q1 2019 data found 14% of UK businesses were experiencing severe financial distress. Notably, the property sector saw a 13% year-on-year increase in the number of companies in significant distress.
Construction businesses involved in development projects have suffered, with a 10% year-on-year increase in financial distress for these businesses – further evidence of significant problems in the retail sector.
Decreased rent yields will likely reduce development projects, signalling challenges for businesses in that process like shopfitters, car park operators or suppliers of fixtures and fittings.
The Struggles at Intu
Intu faces a battle to remain profitable in the face of poor demand and rent reductions from retailers in its shopping centre.
Intu is funded in large part by equity, which means they are well placed to weather the storm, but profits have fallen considerably – from £600m in 2014 to £227m in 2017 – and the decline is stark. In 2014 Intu purchased Westfield Derby and Merry Hill Centre for £867.8m and the returns from these investments are unlikely to reach expectations. This has affected the share price profit margins and will affect dividends.
These poor returns from Intu are the result of wider economic trends that are affecting retail – Brexit, business rates, and a move to online shopping being some of the key factors.
It’s difficult to predict what will happen to the retail sector in the coming years; it is almost certain many changes will occur, but as we reported there is hope for the sector.
In the meantime, businesses like Intu will do everything they can to keep people visiting its shopping centres and will likely look to preserve margins in the hope of riding out the downturn.
How Red Flag Alert Can Help
When the retail sector is struggling it sucks other sectors into its struggles, most notably property and construction. In an uncertain environment where financial distress is widespread, businesses all the way down the supply chain can be affected.
A small manufacturing business that provides displays for fashion retailers will likely experience problems when retailers are going out of business, cutting costs, delaying capital expenditure and closing stores.
Red Flag Alert is a vital tool for any business affected by financial distress caused by the slowdown in the retail sector – it can help significantly reduce risk.
Red Flag Alert calculates a financial health rating for all 6.5m UK businesses. These health ratings are updated in real time and use all available data to provide a rating that predicts business failure in the next 12 months.
This is invaluable for businesses further down the supply chain that need to assess the financial health of key clients. If financial distress can be uncovered as early as possible businesses can take steps to manage credit risk.
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Because Red Flag Alert is driven by machine learning it can work with incomplete information. When there is limited financial information on a business, the Red Flag Alert algorithm will use past data to provide predictions based on a range of highly relevant indicators. This means that you can reliably monitor private businesses.
With £1 billion per quarter written off in bad debt due to business failure and an uncertain UK economy, now is the time to invest in using Red Flag Alert.
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To find out how to mitigate risk in your business by using Red Flag Alert, click here to start a free trial.