Jan 25 - Recent high-profile retail failures in the UK will not affect Fitch’s CMBS ratings owing to the limited presence of the affected tenants in shopping centres, which are the predominant collateral type in retail-focused CMBS, Fitch Ratings says. However, these episodes bear out Fitch’s concerns over secondary retail property, where newly-vacated space only adds to the occupancy challenges on the high street and in struggling malls.
The failures of HMV, Comet, Jessops and Blockbuster involve nearly 1,200 stores. Our initial findings indicate that 11 CMBS transactions have exposure to one or more of these as tenants (most frequently HMV), but that they rarely provide more than 2% of rents (in six deals the figure is 1% or less). We currently expect no ratings impact.
In Bellatrix (Eclipse 2005-2) plc, one loan was secured on property in which Comet was the only tenant (the remainder of the space being vacant). We took rating action on this transaction in November for various reasons, which incorporated Comet’s administration. Details are available at www.fitchratings.com.
It is not yet clear what the final outcome will be for each of these tenants, and whether administration will actually disrupt rental payments. For example, HMV stores continue to trade, with its administrators reported in the press this week as saying they remained hopeful of securing a long-term future for the company. While some store closures for each group are inevitable, replacement tenants are likely to be found, particularly in prime sites, although potentially on weaker terms for landlords.
The spate of failures does highlight the challenges facing UK retail landlords from household deleveraging, heavy development and changing consumer behaviour. Prime retail sites retaining clusters of major national retailers have seen rental resilience, which leaves them much better-placed than properties languishing in peripheral locations, where store closures could lead to a “domino effect” as other tenants break leases to take up space in centres enjoying the higher footfall that comes with low vacancy.
High profile tenant defaults dampen confidence, and with it appetite among lenders, and indeed our key concern - as applicable to UK retail CMBS as it is to wider European CMBS, with 227 loans accounting for EUR31.9bn maturing in 2013 and 2014 - remains refinancing risk. Fitch’s CMBS ratings already incorporate considerable levels of stress, not only in the occupational market but also in the financial sector, where secondary commercial property income is heavily discounted. Although there are signs of risk appetite growing across a range of assets, this will take time to filter into non-prime commercial property that secures the majority of the CMBS portfolio.