Problems in U.K. Retail to Impact Real Estate-Related Credit Risk

Following the break of the United Kingdom with the European Union, retailers in Britain have been affected by changes in consumer confidence and the increase of sourcing costs due to the depreciation of the pound. The U.K. nonfood retail industry faces profitability challenges, which will impact the use of real estate in the industry, with a subsequent effect on the credit risk of loans secured by it, according to a new report from Moody’s. The secondary retail property sector is set to be particularly exposed to risks, though logistics and prime retail commercial properties are likely in a position to mitigate them.

“Reduced store productivity and profitability for U.K. nonfood retailers can lead to reduced rents and increasing vacancies in properties securing commercial real estate loans and commercial mortgage-backed securities,” said Stephen Hughes, assistant vice president and analyst at Moody’s. “The degree to which these retail challenges will affect real estate landlords and debt differs, however, between prime logistics, prime retail and secondary retail assets.”

The logistics sector has the benefit of higher occupational demand. “Well-located, high-quality logistics properties will continue to attract strong tenant demand, due to steady growth in online retailing,” said Oliver Schmitt, vice president and senior credit officer at Moody’s. London’s premier shopping streets also benefit from high tenant demand, reducing credit risk affecting loans secured by these assets.

With the continued shift from consumers toward online retailing and other factors, rising cost pressure will continue to weigh on secondary retailers, who already suffer from declining sales productivity.

“The effect of rising costs on store profitability is more pronounced in secondary than in prime retail spots in the U.K., where steady or increasing sales productivity is a buffer against cost increases,” Schmitt said.

Retailers also endure higher expenses from rising employee costs and increased property taxes, particularly in London, Moody’s said.

– Adam Fusco, associate editor

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