In 2018, Toy R Us and Maplin became insolvent; New Look, Poundworld and Mothercare closed dozens of stores in a company voluntary arrangement; Marks and Spencer announced store closures and House of Fraser began preparations to close stores. This, you would think would cause rents to fall but instead according to figures, rents have actually increased.

The MSCI Index provider says retail property rental growth was 0.9% to the first quarter of 2018 and 1% per quarter in the previous two quarters. Intu, a shopping centre landlord, estimated rents were up 1% in 2017 and CBRE said rents were up 1.4% in 2017 for shopping centres.

The numbers do not tell the full story because they are calculated on ‘headline rents’, the gross rent in letting agreements. They do not take account of the various incentives landlords offer such as an initial rent free period of between 6 and 12 months at the outset of the lease.

Landlords offer cash incentives to businesses, mainly to fit out premises. Amounts of up to 10% or more of the value of the lease are common. This is also not included in the headline rent and distorts the ‘estimated rental value’ of properties.

Leases are getting shorter and break clauses more common. A 10-year lease broken in year five, with a one year rent-free period significantly reduces the rent the landlord will receive.

This type of ‘rent masking’ is now very common.

Retailer Next has more than 500 stores in the UK and Ireland. 19 of its leases were renewed in 2017/2018 and Next claims net rents were down 28%. Next claims it will secure rent drops of 27% in 2018/2019, not including the 10 shops it will close.

The stock market provides a clue to what is actually happening with two of the UK’s biggest listed retail-only property companies. Hammerson stock is trading at a discount of 30% + to the book value of its assets while Intu is closer to 50%. Investors would seem to believe that retail rents and capital values will fall quite a bit.