How are Tenant bankruptcies and vacancies playing a role: Look at Unibail-Rodamco-Westfield

  • Jul 31, 2020 AEST
  • Team Kalkine
How are Tenant bankruptcies and vacancies playing a role: Look at Unibail-Rodamco-Westfield


  • The impact of new social distancing norms and associated paradigm shift in consumer behaviour on retail economics deserve closer attention.
  • Despite the pandemic impact, Unibail-Rodamco-Westfield reported some emerging green shoots across footfall figures, tenant sales and tenant negotiations.
  • Visitors traffic has increased substantially in European centres.
  • The group believes to have recorded an uptick in e-commerce penetration, with strong resilience amidst pandemic.

Novel coronavirus has disrupted economies, market and businesses—especially the first half of 2020 which saw unprecedented times. Despite the extraordinary measures taken by the Government to stop virus spread and support income levels, the growing number of cases and impact on domestic businesses are still a matter of concern. As inventories started to run low, international supply chains became increasingly affected.

Social distancing norms and changed consumer preferences cast a deep blow on the retail industry, specially brick-and-mortal stores, with take-aways and e-commerce gaining popularity.

As the restrictions in lockdown ease, shopping centre owners, landlords and tenants are looking for new ways to attract the visitors and boost sales. One retail transaction leads to many other deals and more support businesses keep running.

The new norms amidst health crisis are leading to a change in consumer behaviour, and this change doesn’t look beneficial for retail economics. Shopping centre owners are facing the mounting risk of tenant bankruptcies and vacancies amidst income squeeze and rapid transition in consumer demand patterns.

A recent Mckinsey report predicts decreased footfall in the malls because people are staying away from the crowd and choosing to shop online risk-free.

The retail industry is facing challenges to manage inventories. Disruption in the manufacturing sector and supply chain going haywire is another reason for the industry to worry.

Moreover, these retail stores have started to open for public but with entirely new norms to keep a check on the virus spread. Guidelines such as temperature check, compulsion on wearing the mask, hand sanitisers and crowd management are being implemented, fundamentally changing the experiences for consumers.

A 1986 New York Times article describes a mall as "a place where nobody lives, but everybody buys.” People go to malls for various reasons, some want to shop, some want to watch movies, some visit game arcades with kids, some go to eat, and some just go to relax and not indulge in any activity. The chaotic yet soothing experience is what people crave for.

Unibail-Rodamco-Westfield (ASX:URW): Footfall Recovering

Is it going to be the same for shopping centre owners as it was pre-COVID?

Unibail-Rodamco-Westfield is under the spotlight - a global operator of shopping centres, having more than 102 centres mainly in Europe and the United States.

Source: URW ASX release

URW suffered from the pandemic impact as well, its recently released half-year results suggest. Its all about the recovery post easing of restrictions.

From the month of March 2020, URW was forced to shut most of its shopping centres. The Gross Market Value of the group's assets has decreased by 7.6% to €60.4 bn as on 30th June 2020.

However, the report suggests that after the reopening, the footfall has improved relatively well than the expectations. In response to the COVID-19 crisis, the company retained its liquidity by raising funds from debt markets (€2.2 Bn senior bonds) and deferring non-essential CAPEX. URW also cancelled the final dividend (€748 Mn) and implemented cost-cutting measures.

The group had €12.7 bn of cash on hand and undrawn credit facilities available as on 30 June 2020. Closing the disposal of 54.2% stake in its portfolio of five French shopping centres, URW now plans to dispose its €4 bn of assets over the next few years.

Till 30th June 2020, URW’s 97% stores in the Europe region were opened, and 77% in the USA. Notably, Visitors traffic is increased substantially in European centres. The areas that opened 11 to 12 weeks back are showing footfall 80% to 90% the same as 2019.

In the UK, footfall was at 50% as leisure operators are under restrictions and people are asked not to come to offices or take public transport to avoid the crowds.

Also read: Unibail-Rodamco-Westfield’s Net Rental Income Hit by COVID-19 Pandemic

Tenant Sales and Rent Collection Showing Promising Signs

The half-yearly report suggests that URW’s tenant sale through February 2020 performed well and it was up by 2.2% for the group. Tenant sales were impacted less than footfall in June, on the back of higher conversion and average baskets.

In Continental Europe where centres were open for the month of June, the recovery for tenant sale shows more than 80% over the same period last year. This excludes F&B, entertainment and mainly fashion. These categories were particularly impacted because summer sale was postponed.

The best performing categories were:

  1. Home (+5.6%),
  2. Culture/media and technology (+1.7%),
  3. Food stores (-0.1%),
  4. Jewellery (-7.7%) and
  5. Gifts (-8.3%)

Besides, 67% rent collection for shopping avenues division was reported in H1 (94% for Q1, 38% for Q2). 3% of the Q2 rents are forgiven through rent relief, and about 20% are deferred, as per URW. While, 39% of the lease is overdue and to be collected. As on 24th July 2020, rent collection was noted at 50%.

URW says the leasing activity is severely affected by the COVID-19 pandemic. Only 661 leases were signed by the group, down by whopping 44% compared to H12019. But the group believes that the activity showed strong uplift in few regions: Spain (+29.0%), France (+15.4%) and Central Europe (+14.1%), with +5.5% overall in Continental Europe.

The half-yearly report says, despite a high level of tenant bankruptcies, vacancy is increased by only +140 bps for the Group to 6.8%. In Continental Europe, the vacancy rate came to be 3.9% (2.5% as of 31st December 2019).

Market Positioning

Although it is very early to draw any conclusions, the group believes to have recorded an uptick in e-commerce penetration and business resilience in the face of COVID-19 crisis. In many markets, it's brick & mortar sales are also returning to normal levels.

As the retail industry is seeing unprecedented times, URW is changing its strategies to meet the targets. Along with retail digitalisation, the group has rolled out initiatives like smart parking, a line pass, curbside pickup and most importantly, food delivery. The group also partnered with Zalando to improve the digital experience for consumers and increase its tenants' omnichannel capabilities.  

To deal with COVID-19 crisis, URW deferred €500 mn development and operating CAPEX. The group also shelved projects costing additional €1.6 bn from the pipeline in H12020. Currently, URW’s development cost in the pipeline is around €6.2 bn, down from €8.3 bn as at 31st December 2019 and from €10.3 bn as at 30th June 2019.

URW’s stock is trading at 3.610 on 31 July 2020 (2:45 PM AEST) with a market cap of $10.47 billion.


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