Why The UK's Supply Chain Crisis Could Be A Mega-Headache For Landlords

From McFlurries to carbon dioxide gas, via ordinary household groceries and Haribo sweets, the UK is in the grip of a supply chain crisis. 

Exclusive data provided to Bisnow shows it likely means more bad news for landlords, some of whose tenants may now fail to make it through the vital pre-Christmas trading period.

Every day something new falls into the vortex of the UK’s supply chain crisis. 

An ever-growing list of life’s essentials (and some of its luxuries) are either suddenly unavailable, or scarce enough to force eye-watering price rises.

Sometimes it’s just inconvenient, like the snap shortage of chicken pies or Ikea furniture, and sometimes it really matters. For instance, the UK ran out of the glass vials needed for blood tests, and currently has no supply of CO2 gas.

To be fair, some of this is a symptom of a wider global problem. The blood test vials became unavailable because a U.S.-based supplier let down the NHS. The CO2 problem — which poses all kinds of knock-on threats to food packaging and supply — was a consequence of a worldwide rise in energy prices.

But behind the see-sawing struggle of the global economy to recover from pandemic, there sits a uniquely British problem. The pandemic coincided with the Brexit-related exodus of European workers, creating a massive labour market shock. The number of vacancies throughout the economy is at a record high, and it is particularly acute among the drivers of heavy goods vehicles. There are thought to be 100,000 HGV driver vacancies, meaning 1 in 6 driver jobs are unfilled.

Add the additional friction created by new border paperwork, and the Brexit-related disruption of four decades of trading arrangements, and you have a perfect storm. 

At the macro level there are suggestions that a period of stagflation could be on the way.

Down at the micro level, the big danger is that supply chain glitches are the final straw for many retail and leisure operators as they fail to hit their Christmas trading targets. The result would mean more tenant defaults, more impaired rental income and, inevitably, more pressure on capital values. It could even tip some landlords over the edge.

These are gloomy possibilities. So how likely are they to come to pass?

Data shows UK retailer stock levels are at historically low levels — the lowest since 1983, according to one estimate.

This suggests that further supply chain disruption could quickly leave shelves empty, with rapid consequences for takings, turnover and profit.

It has also become clear that the run-up to Christmas, always the key trading period, is more important than ever this year, as retailers and leisure operators attempt a recovery from lockdown and 18 months of suppressed in-person trading. In particular, they need to generate cash ahead of the March 2022 end of the moratorium on landlord action to recover commercial rent. 

“A strong Q4 2021 is crucial to ensure retail businesses are able to absorb returning to full operational cost outlay despite trade and footfall in city centres improving but still not returning to pre-pandemic levels,” CBRE Head of Retail Occupier Services Graham Barr told Bisnow. “Strong trading in the run-up to (and over) the Christmas period will be key to prevent a repeat of the business failures seen in 2020. However, this still may not be enough, so there may be requests for additional assistance measures in some instances.”

On top of this, retail and leisure operators have been getting progressively worse at paying their rent as the economy opened up — more or less exactly the opposite of what might have been expected. This is a big, red flashing warning light as the September 2021 quarter day approaches next week. 

“You would have thought the summer’s economic reopening would have shown the economy reviving, and yet the rental collection data doesn’t paint a fantastic picture," said Re-Leased researcher Caleb Dunn, analysing 30,000 leases. "Rental collection in retail is still 10-15% behind that in other property sectors.” 

“The issue for the landlords is that each quarter day compounds the effects. The amount of rental delinquency is building up. Look, for instance, at how much rent is paid on the quarter day itself and that figure is sliding backwards. It was just 8% in June, down from 17% in December 2020, and far down on December 2019. Compare that 8% with the equivalent 33% in the office sector, and it's clear the retail sector’s delinquency is getting progressively worse.”

The MSCI UK Quarterly Property Index, drawing on studies from Income Analytics, suggested that the risk of default in leisure operators doubled between December 2019 and June 2021.

These are all straws in the wind, but they are not encouraging.

Fortunately, we can do better than anecdote. Unique research prepared for Bisnow by specialist data firm Income Analytics can help clarify the risks run by landlords. Using sophisticated algorithms and a mass of unfiltered data, its 'quant' approach offers a degree of clarity.

Bisnow asked Income Analytics to look at a group of 30 retailers who had already faced trading difficulties, or where expectations were impaired, to assess the problems they might face as a result of the current issues in retail and leisure supply chains.

The answer came back that default risks, thanks to the supply chain crisis, are real and serious for some landlords who rely on at-risk tenants. However, they are not yet a very widespread danger.

The graphs above show the relative risk of rental default for each retailer based on a high-level analysis of their performance. Data has been anonymised but an indication of their retail sub-sector (apparel, grocery) remains. In the first chart, the higher the score the less likely they are to default: 100 is near certainty they are safe, and anything below 45 indicates a balanced risk they might default.

The second chart measures change over 24 months so that the lower the scores mean a more radical change in the wrong direction. As a glance shows, some retailers are on a sharp downward path and are almost certain to default, with or without additional supply chain disruption.

“With the exception of a few outliers, most retailers are in quite a strong position to withstand shocks to their supply chain,” Income Analytics founder Matthew Hopkinson told Bisnow. “But you can see a distinct decline in the fortunes of some apparel retailers, these are the most challenged, and the most dependent on bricks-and-mortar retail rather than online.

“The second chart shows that the perception that retail is doom and gloom for everything is not right. Yes, there are a few bad eggs and a few outliers driving the perception.”

Hopkinson’s conclusion is that, of the firms analysed for Bisnow, the apparel sector remains at the greatest risk if supply chains remain fragile. 

“It depends how long their supply chains are. In apparel it could be China, or it could be Turkey or Spain — and the longer it is, the more issues it raises. There’s also potential for trouble in the relationships with manufacturers, some of whom will themselves have viability problems,” he said.

Does the Income Analytics data suggest that the supply chain crisis could be the straw that breaks many retailers’ backs? For those already weakened, yes, Hopkinson said.

“Increased costs, reduced sales — it is easy to see some businesses will not perform as well. We’ve seen so often how retailers bounce in and out of CVAs (protective administration), then they bleed and bump along until eventually that’s it. Look at our scoring, there are a couple there scoring below 10, that’s pretty low, they clearly have major issues and the supply chain crisis could be the infection that finally kills off a weakened business.

“But if they go, the collapse will have been a long time in the making. The supply chain crisis was just the coup de grace. Some businesses went into this sick, and you can’t run a marathon with flu,” Hopkinson said.

In this sample there were four out of 30 businesses that fell into this category. The data has been anonymised, but it is fair to say that these are not inconsequential retailers. Landlords will notice if they fail this winter. The supply chain crisis will claim victims and by January — the traditional season for retail crisis — we will know who they are.